Construction Industry Scheme
Introduction The Construction Industry Scheme (CIS) sets rules for contractors and sub-contractors in the construction industry concerning the deduction and payment of income tax and National Insurance contributions (NICs).
The CIS applies to most construction work carried out in the UK, including preparation of a site, dismantling, demolition and construction, repairs and decorating.
Here we provide an overview of the CIS and explain who the scheme applies to, how it works, the procedures involved in registering, making payments and reporting under the scheme and the steps contractors and sub-contractors need to take to ensure compliance. We also briefly explain the penalties and tax implications arising from failure to comply with the rules.
What is the CIS? The CIS is a statutory HM Revenue & Customs (HMRC) scheme involving a set of rules for the calculation, deduction and payment of tax and NICs owed to HMRC by contractors and sub-contractors in the construction industry.
Who does the CIS apply to? The CIS applies to contractors and sub-contractors in the construction industry, including overseas businesses that act as contractors or sub-contractors for construction work carried out in the UK. All business structures are covered by the scheme, including companies, partnerships and sole traders, but the scheme does not cover employees who are subject to Pay As You Earn (PAYE).
The definitions of contractor and sub-contractor are wider under the CIS than the generally accepted definitions of these terms.
Contractors include the following categories:
Mainstream contractors: businesses that include construction operations and pay others for work covered by the CIS; property developers; labour agencies supplying workers to contractors; and gangmasters who organise construction labour.
Deemed contractors: businesses, public bodies and other organisations that do not include construction within their core operations but have spent over £3 million on construction projects during the previous 12 months. Such organisations include, for example, private sector firms, public sector bodies such as local authorities, government departments, banks, housing associations, development corporations and National Health Trusts.
Under CIS, private householders who pay for work such as extensions and repairs to be carried out on their property, or who engage firms to construct a new-build home, are not defined as contractors.
Sub-contractors are organisations or individuals (not including employees) that have agreed to carry out construction work on behalf of a contractor. They may do the work themselves or use employees, or they may hire other sub-contractors to carry it out for them in which case they will be both contractors and sub-contractors.
Sub-contractors who are subject to CIS may be sole traders, people working in partnerships, companies or public bodies. They include:
Labour agencies supplying workers to contractors.
Gangmasters who organise construction labour.
Local authorities carrying out construction work for other people.
Work excluded from the CIS Some construction projects are excluded from the scheme. They include:
Expenditure incurred by deemed contractors that relates to property used for the purposes of their business.
Construction contracts amounting to less than £1,000 (excluding the cost of materials) entered into by deemed contractors.
Construction contracts amounting to less than £1,000 (excluding the cost of materials) in which a sub-contractor is paid to undertake work on property that they own or rent.
Work done to local authority maintained schools.
Payments made by charities for work done (unless the payments are made by the trading arm of the charity).
Some jobs are excluded from the scheme. They include:
Architecture and surveying.
Scaffolding hire (with no labour).
Carpet fitting.
Delivering materials.
Non-construction work on a site, such as running a canteen.
Registration All new mainstream and deemed contractors must register with HMRC as soon as they are about to take on their first sub-contractor. Registration is completed online, and contractors will then be sent a letter with the information they need to start working as a CIS contractor.
Sub-contractors should register with HMRC under the CIS as soon as they are about to begin working in the construction industry. Registration can be completed online, however, sub-contractors who are sole traders can also register by phone.
By default, sub-contractors will be registered under the 'payment under deduction' scheme, which means that contractors will make tax deductions from payments to them at the rate of 20%. But sub-contractors who meet certain qualifying conditions may be eligible for 'gross payment status'. This means that no deductions will be made by contractors from their payments. Instead, they must make payment of all tax and NICs at the end of the tax year themselves.
If sub-contractors do not register with the CIS, contractors are obliged to make deductions from payments to them at the higher rate, which is currently 30%.
Verifying and paying sub-contractors Before making payments to a new sub-contractor (or a sub-contractor they have not used in the last two tax years), the contractor must 'verify' them with HMRC, who will then inform the contractor:
Whether the sub-contractor is registered with the CIS.
The rate of tax and NIC deductions (if any) the contractor must make from the sub-contractor's pay.
Contractors can verify sub-contractors either by using the free HMRC CIS service at www.gov.uk/use-construction-industry-scheme-online, or by using HMRC-approved commercial CIS software.
If a deduction is required, the contractor must calculate and make the deduction, and then make the net payment to the sub-contractor, also giving them a payment and deduction statement.
Payments and returns to HMRC When contractors register with HMRC, a CIS payment scheme is set up to enable them to pay HMRC the deductions that they have made. If the contractor already has employees, HMRC will change their existing PAYE scheme to a PAYE/CIS scheme. Deductions must be paid to HMRC monthly or quarterly.
Contractors must also submit monthly returns, including details of their sub-contractors, how much they have paid them, the deductions they have made and a declaration that the contractor has considered and verified the tax status of all sub-contractors.
Contractors do not need to file a return for months in which they have made no payments to sub-contractors, but they must tell HMRC that no return is due.
Contractors who have temporarily stopped using sub-contractors can ask for their scheme to be made inactive for up to six months.
Record keeping
Contractors making payments to sub-contractors must record details of the gross amount of each payment (excluding VAT) and the amount of any deduction. If the sub-contractor's invoice included any material costs in addition to their charges for the work they have done, the contractor must also record those material costs.
Records must be kept for at least three years after the end of the tax year they relate to.
Reporting changes Contractors and sub-contractors must report certain changes in their business to HMRC. For example, contractors must report any decision to stop using sub-contractors temporarily or permanently, and contractors and sub-contractors both have to report any change in their business structure, such as from sole trader to private limited company.
Tax issues Contractors also have to complete their own tax returns, either as self-employed individuals or as companies. If they also act as sub-contractors, any deductions made from payments to them for tax and NICs will be offset against their final tax bill.
Sub-contractors must register with HMRC as sole traders, as partners or as limited companies and complete tax returns annually. Sole traders and partners must complete a self-assessment tax return, showing payments and any deductions made by contractors. Deductions that have already been made will be credited to their final tax and NIC bills. Sub-contractors trading as limited companies must claim back any deductions through the company's payroll scheme.
Using tax agents Tax agents such as accountants can deal with CIS matters on behalf of contractors, but must first be formally authorised by HMRC. Agents can register online and carry out various agreed tasks, including verification of sub-contractors and filing CIS returns.
Penalties for non-compliance Contractors who are late in filing monthly returns will be charged a penalty, ranging from £100 for returns that are one day late to £3,000 or 100% of the CIS deductions on the return (whichever is higher) for returns that are more than 12 months late.
Penalties are also charged for negligent or intentional errors on monthly return forms and a penalty of £3,000 may be charged if a contractor provides the wrong employment status for a sub-contractor on a monthly return.
Contact Ashored for more information on the Construction Industry Scheme and working with contractors.
