If you are self-employed in the building or construction trade, you should pay tax under the Construction Industry Scheme (CIS).
This guide will explain what the Construction Industry Scheme and answering the following:
- When do contractors and subcontractors need to register for CIS?
- What construction work does the CIS cover?
- When does the CIS not apply?
- How do CIS deductions work for contractors?
- How do CIS deductions work for subcontractors?
- What are the rules for CIS and IR35?
- How can Countingup help?
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a system HMRC uses to collect income tax from subcontractors working in construction. Under the scheme, contractors deduct money from a subcontractor’s payments and pass the amount to HMRC.
These deductions work as advance payments towards the subcontractor’s tax and National Insurance contributions.
If you’re a CIS-registered subcontractor, the contractor that employed you withholds 20% of their payments to you. If you’re not registered, the amount is 30%.
When do contractors and subcontractors need to register for CIS?
Contractors need to register for CIS if:
- They pay subcontractors for construction work
- Their business doesn’t do construction work but has spent more than £3 million on construction in the 12 months since they made their first CIS payment (a ‘deemed contractor’)
Subcontractors need to register if:
- They do construction work for a contractor
Small businesses could fall under either one or both of these categories. If your company falls under both, you’ll need to register as a contractor and subcontractor.
What construction work does the CIS cover?
According to HMRC, the CIS covers all construction work, including:
- Site preparation
The scheme also covers all business structures, including limited companies, sole traders and partnerships.
However, there are some job types the CIS doesn’t cover, including:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Delivering materials
- Non-construction work, like running a canteen
When does the CIS not apply?
There are some situations in which CIS doesn’t apply if you’re a contractor, such as if your work is:
- Paid for by a charity or trust
- Paid for by a governing body or headteacher of a maintained school on behalf of the local education authority
- On the subcontractor’s own property and worth less than £1,000, excluding materials
The scheme also doesn’t apply to deemed contractors you’re paying for:
- Work on a property for your own business that’s not for sale or rent
- A construction contract worth less than £1,000 excluding materials
How do CIS deductions work for contractors?
As a contractor, you need to register for CIS before you take on your first subcontractor.
How to register for CIS as a contractor
To register for the scheme, you need to set up as a new employer with HMRC. Once you’ve registered, HMRC will contact you with the information you need to register as a CIS contractor.
When registering as a new employer, you must do so before the first payday. Bear in mind that it can take up to five working days to get your employer PAYE (Pay As You Earn) reference number. However, you can’t register more than two months before you start paying people.
Finally, if your business starts employing people on or after 6 April (the start of a new tax year), you’ll get your employer PAYE reference number by 31 July.
What if I need to pay someone before I have my PAYE reference number?
To pay an employee before you get your employer PAYE reference number, you should:
- Run payroll (more information here).
- Store your full payment submission (a document that employers need to submit to HMRC every time they pay their employees).
- Send a late full payment submission to HMRC. However, if you send a late full payment submission without a valid reason, you may get a warning message or a penalty for reporting late.
Working with new subcontractors
Before working with any subcontractors, you need to verify them with HMRC to see if they’re registered for CIS or not. You need this information to determine which rate you should make the CIS deductions at (20% for registered and 30% for non-registered). You can verify a subcontractor using either:
The details you need to verify a subcontractor include:
- Your Unique Taxpayer Reference (UTR)
- Your HMRC accounts office’s reference number
- Your HMRC employer reference
You’ll also need some details from the subcontractor. If they’re a sole trader, you need:
- Their UTR
- Their National Insurance number
For limited companies, you need their:
- Company name
- Company UTR
- Company registration number
If you’re working with a partnership, you’ll need:
- Their nominated partner details
- Their trading name
- Their partnership UTR
If you’ve worked with a subcontractor without including them on a CIS return (explained in a later section) for the last two years, you must verify them again.
Making CIS deductions when paying subcontractors
As we’ve already explained, as a contractor you need to make CIS deductions at the rate HMRC tells you when you verify the subcontractor.
When making deductions, you start with the subcontractor’s gross payment (the total sum of their invoice) and take away their expenses, including for:
- Equipment that is now unusable (‘consumable stores’)
- Fuel used, except for travelling
- Equipment hired for this job (‘plant hire’)
- Manufacturing or prefabricating materials
Finally, you need to pay the CIS deduction for each subcontractor to HMRC by the 22nd of each month through the CIS scheme they set up for you when you registered. If you don’t, HMRC might charge you interest or penalties.
After paying them, you also need to give your subcontractors a payment and deduction statement within 14 days of the end of each tax month.
To avoid any mixups, it’s crucial to keep accurate records of the gross amount your subcontractors invoiced, as well as for expenses and deductions. Importantly, you must hang on to these records for three years after the end of their respective tax year. Fail to show your records to HMRC and you could get fined hefty sums. We’ll explain more about penalties in the next section.
Filing CIS monthly returns as a contractor
As mentioned, you have to inform HMRC about the monthly payments you make to subcontractors. You do this by sending a monthly CIS return, which you have to file by the 18th of each month. If you miss that deadline, HMRC could hit you with a £100 penalty. Doesn’t sound too bad? That penalty can increase to £3,000 depending on how late you file your CIS return. Not ideal!
You can file returns using the CIS online service or commercial CIS software. Even if you haven’t paid any subcontractors in a particular month, you still need to tell HMRC. You can do so using your CIS online account, to which you get access when you register.
However, if you stop using subcontractors temporarily, you can make an inactivity request by contacting HMRC. The request lasts six months (unless you contact HMRC to lift it early).
You also have to let HMRC know if:
- Your address changes
- Your business structure changes
- A contractor dies
- You take on another contractor’s business
- You’ve stopped trading or using subcontractors
How do CIS deductions work for subcontractors?
As a subcontractor, you don’t need to register for CIS. However, it might still be a good idea since registered subcontractors only get 20% of their payment deducted rather than 30%.
Alternatively, you may be able to apply for ‘gross’ payment status, which prevents your contractor from making any CIS deduction. Subcontractors might qualify for this status if:
You also need to have an annual turnover of above £30,000. HMRC reviews gross payment status every year, so keep up with the conditions of the scheme (like meeting tax deadlines) to make sure you comply.
How to register for CIS as a subcontractor
To register for the CIS scheme, you need your:
- Business or trading name
- National Insurance number
- Unique Taxpayer Reference (UTR)
- VAT registration number if you’re VAT-registered
However, the process for registering is different depending on your business’ legal structure:
- Sole traders can register for CIS online, using your UTR and Government Gateway ID and password for your Self Assessment (you’ll need to register for Self Assessment to get these details).
- Limited companies fill in this company registration form.
- Partnerships fill in this partnerships registration form. Note that HMRC will treat this registration as separate from the sole trader registration.
Getting paid through CIS
Before you can get paid through CIS, your contractor must verify you with HMRC. Make sure you give them the same business name you used when setting up your business, as well as your Unique Taxpayer Reference.
Your contractor can’t verify you if you’re not registered, meaning your CIS payments will be subject to the higher 30% deduction rate.
After paying you, make sure your contractor sends you your CIS statements within 14 days of the end of each tax month. You need these to work out if you will owe tax or National Insurance or if you’re due a refund for paying too much.
Additionally, there are certain expenses on your invoice that your contractor will take off your gross payment before CIS deductions. These include costs for:
- Materials that you’ve paid for directly
- Equipment that is now unusable (‘consumable stores’)
- Plant (factory) hired for the job
- Manufacturing or prefabricating materials
It’s also important to keep accurate records for your Self Assessment tax return.
CIS deductions and paying tax
Since your CID deductions go towards your tax and National Insurance contributions, they also affect your overall tax liability (how much you owe).
Sole traders and partners paying tax through Self Assessment should record the complete invoice amounts as income and then list CIS deductions in a dedicated section.
HMRC will use your Self Assessment tax return to work out how much you owe. If you still owe tax, you need to pay it by 31 January after the end of that tax year. However, HMRC might also owe you a refund.
Limited companies can claim back CIS deductions through the monthly payroll scheme.
What are the rules for CIS and IR35?
Quick reminder: IR35 is a piece of tax-avoidance legislation to prevent both businesses and contractors from abusing loopholes. Employing a contractor is more tax-efficient for companies because they don’t have to pay National Insurance for the individual and save money on other benefits an employee would enjoy.
It’s important to remember that the IR35 takes priority over CIS. So, contractors, subcontractors and clients need to factor it into the current process when dealing with construction contracts.
Where payments are subject to PAYE under the IR35 rules, you don’t need to worry about CIS. However, if the revised IR35 rules don’t apply to your contract, your client must consider whether they need to withhold tax on payments under the CIS rules.
If IR35 doesn’t apply, CIS takes priority for most clients, unless their annual turnover is over £10.2 million. However, if you’re registered as self-employed, you must consider both IR35 and CIS according to the revised IR35 legislation.
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