The construction industry scheme works a little like a payroll scheme but for the constructions industry.
Contractors employ subcontractors for jobs, on which they must deduct tax but not national insurance and pay it monthly to HMRC. Deductions count as advance payments towards the subcontractor’s tax and National Insurance bill.
A contractor is a company or a person who employs a subcontractor to do construction work and may be a sole trader, a partnership or a limited company.
Mainstream contractors are builders, labour agencies, gangmasters (or gang leader) or property developers.
CIS Pitfall
Be aware – deemed contractors. If your business does not do construction work but you spend an average of more than £1 million a year on construction in any 3-year period – you must also register as a contractor for the project and pay CIS tax to HMRC.
Subcontractors are workers who work for contractors. They can also be a sole trader, a partnership or a limited company. They will be responsible for their own tax and national insurance.
CIS Deduction Rates
Subcontractors may pay tax at three rates:
- 0% Gross Payment Status – if the subcontractor is trading as a business rather than a self-employed subcontractor, they can apply for gross payment status. This may be granted if the business passes three tests:
- Business Test: That the business operates as a business – issuing invoices and receiving payments into a business bank account.
- Turnover Test: >£30,000 for a sole trader, or £30,000 per director if a limited company
- Compliance test: In the last 12 months – the business must have filed all tax returns on time and paid all tax in full and on time.
- 20% CIS reduction for verified subcontractors
- 30% higher rate CIS deduction for unverified subcontractors
Verifying subcontractors
It is your responsibility to verify the subcontractors you use, this can be done quickly and easily through HMRC’s CIS online system.
Subcontractors do not have to be registered with HMRC, but it’s in their best interests to be verified to avoid the higher rate CIS tax deduction.
You may need to deduct CIS tax at the higher rate for a new unverified subcontractor. You cannot refund that back to the subcontractor once they are verified – they must wait until the end of the tax year and submit their self assessment tax return. HMRC will refund any overpayment due.
Exempt jobs, not subject to CIS
The objective of the CIS scheme is to provide a tax structure for general building and contractors – where subcontractors providing labour are generally self-employed and move from job to job. Some jobs are exempt from the scheme:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- delivering materials
- work on construction sites that is clearly not construction, eg running a canteen or site facilities
Contracts
It is good practice to engage your contractors with a contract – the contract will state whether or not the contractor is employed or self-employed.
You can employ subcontractors as staff and deduct tax and National Insurance if you prefer or you can engage them as subcontractors under the CIS scheme.
Registering as a contractor
Before you can start running a CIS scheme, you must register as a contractor.
- First, you must register as an employer (assuming you are not already registered) – HMRC will issue you with a PAYE reference number
- Secondly, you must register as a contractor under the CIS Scheme. You’ll need the PAYE reference number for this.
Key Elements
There are three key elements that need to be recorded and reported to HMRC when running a CIS scheme.
| Element | In more detail… | How to report to HMRC | |
| 1 |
CIS deducted on payments |
Some CIS subcontractors will invoice the contractor for the work they have completed and any materials purchased.
Others will have an agreement with the contractor that means the contractor is responsible for making the payment and producing a payment and deductions statement confirming the CIS deducted. CIS subcontractor invoices will show a gross pay for works done plus materials, less CIS tax on the labour element. The contractor pays the net amount to the subcontractor and the CIS tax deducted to HMRC. You must report all payments made to sub contractors to HMRC during each period. Payments include:
A period runs from the 6th to the 5th of each month – for example the 6th April to the 5th May. CIS returns must be submitted within 14 days of the period end; by the 19th of the month.
If provided monthly, the payment and deduction statements must be issued to each subcontractor within 14 days of the period end; by the 19th of the month. |
Either via CIS Online OR through your payroll system |
| 2 | CIS Suffered
on Sales |
It’s common for a contractor to also be a subcontractor himself – providing services for other contractors.
In this scenario, the contractor ‘suffers’ CIS on the invoice raised to the contractor – CIS tax will be deducted by the customer and can be offset from the amount deducted from subcontractors reducing the balance payable to HMRC. |
Through the EPS submission in your payroll system |
| 3 | CIS Paid | The amount you have paid to HMRC.
Payments must reach HMRC by the 22nd of each month (19th if you are paying by post) – keeping a clear record of payments made and payments due, will ensure you don’t under or overpay HMRC. Ensure all payments made to HMRC contain your 13 digit PAYE reference number so they can be allocated to your account. |
No need to report to HMRC unless you have made a payment that HMRC cannot trace. |
Example of the 20% deduction
| Example 1. Bob is a registered subcontractor who regularly invoices for the work he has done.
Bob wants to charge for £500 of labour and £200 of materials and £25 of travel expenses. His invoice would look like this: |
|
| Labour | £500 |
| Materials | 200 |
| Travel | £25 |
| Total to charge | 725 |
| Less CIS on the labour element only (£500 x 20%) | -£100 |
| Total invoice amount and payment due | £625 |
| Example 2. Harry is a VAT registered subcontractor who regularly invoices for the work he has done.
Harry wants to charge for £500 of labour and £200 of materials Which includes VAT) and £25 of travel expenses. His invoice would look like this: |
|
| Labour | £500 |
| Materials (net of VAT) | £166 |
| Travel | £25 |
| Total to charge | £691 |
| Less CIS on the labour element only (£500 x 20%) | -£100 |
| Total net of VAT | £591 |
| Plus VAT at 20% | £118 |
| Total invoice amount and payment due | £709 |
HMRC could ask to see your CIS records at any time.
Record retention – how long must you keep records for?
Under the Construction Industry Scheme (CIS), you must keep records of:
| Data | Where? | |
| 1 | The gross amount of each payment invoiced by subcontractors, excluding VAT | These are your purchase invoices or payment and deduction statements. |
| 2 | Any deductions you’ve made from subcontractor payments | Ensure that your contractor has clearly noted the CIS deduction on their invoice to you and your payment and deduction statement to them.
If it is incorrect or missing, ask them to amend their invoice. |
| 3 | If you made deductions, you must also keep records of the costs of materials the subcontractor invoiced you for, excluding VAT. | Ensure that your contractor has clearly noted the material charges on their invoice to you and your payment and deduction statement to them. |
Keep these details for at least 3 years after the end of the tax year they relate to.
See also: Accounting for CIS
