Insights: The Construction Industry Scheme
Our accounts and bookkeeping assistant, Ashleigh, takes a look into what exactly the Construction Industry Scheme (CIS) is, who needs it, and how qualifying individuals can register.
What is CIS?
The Construction Industry Scheme (CIS) is a government scheme that requires contractors to deduct money from a subcontractor’s pay and pass it to HM Revenue and Customs (HMRC) as an advance payment towards the subcontractor’s income tax and National Insurance.
CIS includes most construction work such as site preparation, alterations, dismantling, repairs, decorating and demolition to name a few.
On the contrary, under the CIS scheme, work such as architecture, surveying, scaffolding hire (with no labour), carpet fitting, making materials used in construction including plant and machinery and delivering materials are not considered work under the CIS scheme therefore you will not need to register as a Contractor if these activities apply.
Who needs to do it?
Under CIS, all contractors must register under the scheme but not all subcontractors have to register however it is more beneficial if they do. This is because a registered subcontractor only receives a reduced payment of 20% whereas an unregistered subcontractor will receive a 30% reduction. It is possible for subcontractors to have a 0% reduction in their pay if they apply for a ‘gross payment’ status, but certain guidelines must be met to qualify. These deductions should not include the cost of materials or tools incurred by the subcontractor.
Under the HMRC CIS scheme, you qualify as a contractor if either you pay subcontractors for construction work, or your business does not do construction work, but you have spent more than £3 million on construction in the 12 months since making your first payment.
You qualify as a subcontractor if you are self-employed, the owner of a limited company or, a partner in a partnership or trust but do construction work for a contractor.
It is important to distinguish between subcontractors and employees as there may be serious penalties for false classifications. Subcontractors are not employees under the contractor but hired staff to help with certain jobs. For a worker to be qualified under the scheme, they must be self-employed under the terms of their contract and not subject to Pay As You Earn (PAYE) under an employment contract.
You must register as both if you fall under both categories as a contractor and subcontractor and file returns accordingly to the role you played.
When must it be done?
It is important you register for CIS before you take on your first subcontractor. During this process, you will need to verify all subcontractors with HMRC and they will tell you whether they’re registered for CIS and what rate of deduction to use. You must also verify any subcontractors you’ve used before if you have not included them on a CIS return in the current or last 2 tax years.
As a contractor, as you make deductions, you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month. Additionally, you must tell HMRC each month about payments you’ve made to subcontractors within the scheme through a monthly return. Your monthly return should include details of the subcontractors, the payments made, and any deductions withheld, a declaration of their employment status and a declaration confirming that all subcontractors have been verified.
Monthly returns and deduction payments must be sent to HMRC by the 19th of every month following the last tax month. For example, for the month 6th May to 5th June, the return must be sent by the 19th June. This can be extended to the 22nd of the tax month if the return is completed electronically. You do not have to file a return for the months when you made no payments to subcontractors, but you must inform HMRC that no return is due
As a subcontractor, there is no specific time you need to register for CIS however it is more beneficial if you do. If you are a sole trader or partnership subcontractor, your CIS will be recorded at the end of the tax year via your Self Assessment tax return or Partnership return. HMRC will calculate how much income tax and NI will need to be paid for that tax year and minus the amount of deductibles already contributed, giving you the tax liability or tax refund to be paid.
However, if you are a limited company subcontractor, your CIS deductions must be claimed back through your company’s monthly payroll scheme. You will send an EPS statement with your CIS deductions on it, as well as the usual FPS statements. HMRC will then take your CIS deductions off what you owe in PAYE tax and National Insurance, and you shall pay the balance by the 19th of every month following the last tax month.
If your business is based outside the UK, but the construction work as a contractor or subcontractor is in the UK you will still have to file a return.
More information on this is available in the HMRC manual at GOV.UK
You can also find out more about tax refunds claimed under CIS here.
For more enquiries and professional advice on this matter, feel free to contact us.