What is CIS Tax?

The Construction Industry Scheme (CIS) is a programme introduced by HMRC that affects contractors, and the subcontractors they hire for construction work. 

Under the scheme, contractors take a small amount from the money they pay their subcontractors. The amount they take will be passed on to HMRC and contribute toward the subcontractor’s income tax and national insurance. 

Here, we’ll take a closer look at CIS tax and what it means for small business owners. 

Specifically, we’ll be talking about:

• Who has to pay CIS tax?
• What work is covered by CIS?
• How much is CIS tax?
• How do I make a CIS deduction?
• How do I register for CIS tax?

You’ll have to register with the Construction Industry Scheme if:

• you pay subcontractors to do construction work.
• you’ve spent more than £3 million on construction in the 12 months since you made your first payment.

Construction Industry Scheme applies to all business types that work in the construction industry, including:

• companies
• partnerships
• self-employed individuals

Common examples of these kinds of businesses are::

• contractors
• subcontractors
• contractors and subcontractors

Under CIS, “contractors” and “subcontractors” have specific meanings that refer to more than what is normally covered under the term “construction”.

Who counts as a contractor or subcontractor

A contractor is anybody who:

• Pays subcontractors for construction work.
• Doesn’t do construction work but has spent more than £3 million on construction in 12 months.

A subcontractor is anybody who does construction work for  contractor

If you hire subcontractors, but you also do construction work for another contractor, you’ll need to register for CIS as both.

The Construction Industry Scheme covers construction work on:

• buildings or structures
• civil engineering projects (like roads and bridges)

Construction work includes things like:

• preparing the site – like laying foundations or providing access works
• demolition and dismantling
• building work
• alterations, repairs, and decorating
• installing systems for heating, lighting, power, water, and ventilation
• cleaning the inside of buildings after construction work

You don’t have to register for CIS if you only do certain jobs involved in construction. Those jobs include:

• architecture and surveying
• scaffolding hire (with no labour)
• carpet fitting
• making materials used in construction (like machinery)
• delivering materials
• work on construction sites that’s not actually construction – (like running a canteen or site facilities)

You don’t have to worry about CIS if you do construction work outside the UK. But you will have to register if you’re based outside the UK and doing construction work within the UK. 

The amount you deduct from a subcontractor’s pay will depend on whether or not they are registered under the Construction Industry Scheme. 

The deduction rates laid out by HMRC are::

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% if the subcontractor has gross payment’ status

You must pay these deductions to HMRC – they count as advance payments towards the subcontractor’s tax and National Insurance bill.

After hiring a subcontractor, you’ll receive an invoice for the work they’ve done.

Start with the total amount of the subcontractor’s invoice, then take away the amount the subcontractor has paid for:

• VAT
• materials
• equipment which is now unusable (‘consumable stores’)
• fuel used (except for travelling)
• equipment hired for the job 
• manufacturing of prefabricated materials (stuff like aluminum steel, wood, fiberglass and concrete)

It’s normal to ask the subcontractor for evidence that they paid for the materials themselves. .

Finally, deduct the CIS percentage rate from the amount that’s left. The amount you’re left with will be the actual payment you give to the subcontractor.

For example, if you hire a registered subcontractor, they’ll qualify for a 20% CIS deduction. 

Their invoice might look something like this:

• Labour – £1000 + £200 VAT (20%)
• Materials – £200 + £40 VAT (20%)
• Total invoice – £1200 + £240 VAT = £1440

To figure out the CIS tax, we take the total invoice amount (not including VAT): 

• £1200

Then, remove the cost of materials:

• £1200 – £200 = £1000

Finally, apply the CIS rate for registered subcontractors (20%), and subtract it:

• £1000 x 20% = £200
• £1000 – £200 = £800

In this case, you’d pay the subcontractor £800 and send £200 to HMRC. 

You can register for CIS as a contractor or subcontractor on the HMRC website. Your registration process will be different depending on whether you’re a:

• Contractor
• Subcontractor
• Sole trader (subcontractor)

If you’re a contractor, you’ll need to register for CIS before taking on your first subcontractor.

To register as a contractor, you should follow the normal process for registering as a new employer on the HMRC website. This includes limited companies and partnerships. 

When you do, HMRC will send you a letter with all the information you need to start working as a CIS contractor. 

If you’re based outside the UK, there’s a different registration process. 

To register for the Construction Industry Scheme (CIS) you’ll need:

• your legal business name or trading name
• your National Insurance Number
• Your business’ (UTR) unique tax reference number 
• your VAT registration number (if you’re registered for VAT)

You can register for gross payment status at the same time. 

If you already have a UTR, you can register for CIS online. You’ll need your Government Gateway user ID and password.

You’ll have got this when you registered for Self Assessment.

If you don’t have a UTR, you’ll have to register as a new business for Self Assessment.

When you do, you can choose ‘working as a subcontractor’ when prompted, and you’ll be registered for Self Assessment and CIS at the same time.

Like a normal subcontractor, you can register for gross payment status at the same time.

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds, so you’ll be factor CIS tax into your books every month. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.

Find out more here.