What is the Construction Industry Scheme and how does it work?
The Construction Industry Scheme (CIS) is a tax deduction scheme involving the deduction of tax at source from payments relating to construction work (not including materials) from contractors to subcontractors, according to the subcontractor’s tax tatus (as determined by HMRC).
Who’s involved?
The term contractor refers to a person or business that pays subcontractors for construction work, and may include property developers and builders, as well as businesses which are not in the construction industry but have spent £1m or more on construction for the last 3 accounting periods. Private householders are not considered contractors and so aren’t covered by the CIS.
A subcontractor is a person or business undertaking construction work for a contractor, who isn’t an employee of the company (and would therefore be taxed under the PAYE scheme). The subcontractor may carry out the work themselves, or use their own subcontractors (in which case, they must follow the rules for both contractors and subcontractors.)
What counts as construction work?
The CIS covers most construction work, such as:
- Site preparation (e.g. laying foundations)
- Alterations/repairs
- Building work
- Demolition/dismantling
- Systems installation (e.g. for heating, lighting, power and water)
However, certain jobs are considered exceptions, such as:
- Architecture/surveying
- Carpet fitting
- Delivering materials
- Working on a construction but doing a non-construction job, such as running a canteen
There’s a full list available on the HMRC website.
Do I really need to register?
If you pay subcontractors to do construction work then you must register. You’ll also need to check whether you should employ the person rather than subcontracting: if they should be an employee then you may get a penalty.
You’ll also need to check that your subcontractors are registered for the CIS, and what rate of deduction you should apply (or if you can pay them without making deductions). Verifying your subcontractor can be done on the HMRC’s free CIS online service, although there is also commercial software available.
What are the CIS deduction rates?
As mentioned in the introduction, you’ll more than likely have to make deductions when you pay a subcontractor, as advised by HMRC.
The CIS deduction rates are:
- 20% – registered subcontractors
- 30% – unregistered subcontractors
These deductions are paid directly to HMRC and count as advance payments towards the subcontractors National Insurance and tax.
If your subcontractor has ‘gross payment’ status, you won’t make deductions and will instead pay them in full. They are then responsible for paying their NI and tax at the end of the tax year.
How do I make a CIS deduction?
You can’t just deduct 20 or 30% of your subcontractor’s invoice. You’ll need to start with the gross amount, then deduct however much they have paid directly for VAT, materials, any consumable stores, fuel used (excluding travel) and equipment hire.
Once you have that figure, you’ll need to deduct the appropriate rate (as advised by HMRC), which will give you the net amount to pay your subcontractor.
How do I pay HMRC?
When you register as a contractor, HMRC will set up a CIS payment scheme for you, and you must make payments by the 22nd of each month – if you pay late you may be charged interest (or penalties).
It you know that you won’t be paying any subcontractors, you can ask for your scheme to be made inactive (for up to 6 months), and HMRC won’t send you any returns, however you must file a return when you start paying subcontractors again.
For more information on the Construction Industry Scheme, it’s well worth talking to us.