What is the Construction Industry Scheme (CIS)?
It is a scheme whereby contractors are required to withhold tax on certain payments made to subcontractors. The tax withholding tax is either 0% or 20% (if you have registered) or 30% (if you have not registered for CIS) and the contractor make these deductions from the subcontractors’ payment and paid directly to HMRC on their behalf.
The payments are an advance payment towards the subcontractor’s tax and NICs. This is effective for cashflow as the tax liability is now being spread over the financial year instead of having a one-off sum at the end of the year. In many circumstances, under CIS, most subcontractors will have no income tax pay at the end of the year, and many will get a tax refund from HMRC.
If you are a contractor and making deductions from your subcontractors, you have to register with HMRC for the scheme. As a subcontractor, it is highly advisable to register as deductions may be made from your income at a higher rate of 30% if you are not registered compared to the 20% or 0% if you are registered.
What is a “Contractor”?
A contractor is someone who pays subcontractors for construction work. They are required to withhold tax from payments to ‘subcontractors’’. A contractor under CIS would be the obvious building and construction companies however businesses whose normal trade is not construction can still be considered if their average annual expenditure on construction operations in any 3 year period exceeds £1 million on construction work.
Contractors have to make an online monthly return to HMRC:
- confirming that the employment status of subcontractors has been considered
- confirming that the verification process has been correctly dealt with
- detailing payments made to all subcontractors and
- detailing any deductions of tax made from those payments
The contractor must submit the following information to HMRC:
- Subcontractors name
- Verification number
- Gross amount
- Materials amount
- Tax deducted
If you are carrying out construction work for a contractor, you are a subcontractor. If you fall under both categories you are required to register as a contractor and as a subcontractor.
Who does CIS affect?
CIS covers most construction projects involving:
- Permanent or temporary building or structure
- Civil engineering work such as roads, bridges, airports, railways etc
CIS construction work includes:
- Site preparation and cleaning inside of buildings after construction work
- demolition and dismantling
- building work including alterations, repairs, extensions and decorating
- installing systems for heating, lighting, power, water and ventilation
- Any work forming part of land e.g. walls, roadworks, power lines and waterways etc
Certain jobs do not have to register such as:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that’s not construction, eg running a canteen
- or site facilities.
Construction operations do not include operations such as:
- Drilling for oil or gas
- Extracting minerals
Tax Treatment of Payments
Payments by a contractor to a subcontractor will either be made:
- Gross or (where the contract will pay you in full, without deductions, 0%)
- Under deduction of tax (where the deductions are made for you and are paid by the contractor to HMRC as an advance towards the subcontractor’s tax liabilities, 20% deduction if registered or 30% deduction if not registered)
The subcontractor can apply for gross payment status. This means contractors will pay you in full, without any deductions.
If tax is withheld by the contractor it will be withheld at:
- 20% if the subcontractor is registered with HMRC
- 30% if the subcontractor is no registered or
- Under PAYE if the subcontractor is treated as an employee of the contractor.
If you are a CIS contractor and have a limited company, any CIS deductions made by a contractor can be offset against the company’s Corporation Tax liability or refunded to the subcontractor by HMRC after the end of the tax year.
This is the same if you are a sole trader however any CIS deductions are offset against your Personal Tax liability instead.
Where you are a limited company or sole trader as a subcontractor only
The contractor themselves must file a monthly report to HMRC showing the deductions made from all subcontractors they have paid in that month.
As a limited company, you will include the CIS amount deducted by the contractor through an Employment Payment Summary (EPS). You must submit an EPS to HMRC throughout the tax year as part of its PAYE arrangements.
Once the tax year has ended and the final Full Payroll Submission (FPS) has been made, you can complete an online form using your government gateway account. HMRC will use the total amount of CIS deducted by the contractor to reduce your Company’s Corporation Tax liability for the year. Any remaining CIS credit will be refunded to you.
As a sole trader you would include the CIS amount deducted by the contractor throughout the year on your Self-Assessment and this will reduce your personal tax liability. The same as a limited company, if there is any CIS credit left over, this will be refunded to you.
Where you are a limited company paying subcontractors’
You must complete a monthly report to HMRC providing information such as the amount of CIS deducted from your subcontractors (form CIS300). The report needs to be carried out for all businesses you employ as CIS subcontractors. All deductions made will be paid to HMRC in the same way as other PAYE taxes are paid.
Employing subcontractors as a sole trader
If you have subcontractors that you have to pay, you will need to run a CIS payroll for them and complete a monthly report to HMRC providing information such as the amount of CIS deducted. The report needs to be made for all businesses working for you as subcontractors. Any deductions made will need to be paid to HMRC as other PAYE taxes are paid.
Where you are working for a contractor and are also paying subcontractors
If you provide services to a contractor and also use subcontractor then it will be a combination of the above.
- The contractor will make the CIS deductions from its payments to your business
- Your business will make the deductions from the payments it makes to the subcontractors
- The amount your business is due from or is due to pay to HMRC will be the difference between these amounts
How do you register for CIS?
To register for CIS you will need a few things:
- Your business name - you can also give your trading name if it is different
- Your National Insurance Number
- Your Unique Taxpayer Reference Number (UTR) for your business
- Your VAT number if you are VAT registered.
- You will need your Government Gateway ID and password that you used when you registered for Self-Assessment (or other services)
If you’re a sole trader and you already have a UTR, you can register for CIS online. You will need your Government Gateway user ID and password you used
when you registered for Self Assessment.
If you don’t have a UTR, visit here and choose ‘working as a subcontractor’ when prompted to register for Self Assessment and CIS. Limited companies and partnerships have their own online forms. HMRC will register the partnership separately to your sole trader registration - they’ll require your partnership UTR and trading name.
There is also a CIS helpline that you can use if needed.
Send your monthly returns to HMRC by the 19th of every month following the last tax month (which is the 6th to 5th of every month)
You could get a penalty of up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return.
You’ll get a penalty if you miss the deadline for filing returns.
The penalty will be cancelled if you let HMRC know that you did not pay any subcontractors that month.
If you file your return 1 day late you will receive £100 penalty, 2 months late is £200 penalty, 6 months and 12 months have the same fine of £300 or 5% of the CIS deductions on the return, whichever is higher.
For returns later than this, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.
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Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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