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Construction Industry Scheme

CIS Scheme

The CIS lays down rules that contractors must follow when hiring sub-contractors to work in the construction industry. HMRC have set out rules meaning a contractor must assess the subcontractor’s employment status before making payments to them. If they deem the sub-contractor to be self-employed then they may have to deduct CIS tax from the payment depending on the sub-contractor’s payment status.

Are you a Contractor or a Subcontractor?

When considering CIS it is important to define exactly what is meant by a contractor and a sub-contractor as these have specific meaning that is different to their general meaning. There are different rules under CIS for both a contractor and a sub-contractor. ​

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Construction Industry Scheme

CIS CONTRACTOR

You are defined as a contractor under CIS if you;

1. Use sub-contractors for construction work; OR

2. If you spend over £1 million per year on construction operations over a three year period.

CIS SUB​CONTRACTOR

You are defined as a subcontractor under CIS if you;

1. Agree to do construction work for a contractor.

Please note it is possible to be a contractor and a sub-contractor at the same time. Where this is the case you must follow the rules for both a contractor and a sub-contractor.

Not all construction operations fall to be caught by the CIS. Details of operations which are and are not included can be found in HMRC’s guide CIS340.

CIS registration

All contractors must register for CIS and are able to do so either on the HMRC website or by calling HMRC.

Contractors should register at the point that they will be taking on and paying a subcontractor.

Sub-contractors have the option of whether they register for CIS or not. However if they do not register for CIS they will suffer deductions at the higher rate of 30% rather than the standard 20%.

Sub-contractors can register either by calling the CIS helpline or online.

Sub-contractors who wish to register should do so when they are about to start working in the construction industry.

Register for CIS

 

How do Contractors Make Payment and Deductions to Subcontractors?

Under the CIS contractors have to verify a sub-contractor’s payment status and may have to make a deduction from their payment. The deductions paid to HMRC are set off against the sub-contractor’s own tax liabilities via their Self-Assessment Tax Return. If the sub-contractor has paid too much, HMRC will issue a refund. If the contractor owes more in tax than they have suffered, they will need to pay the difference.

There are two rates that a contractor can deduct from a sub-contractor;

Standard rate: This deduction will be applied to all sub-contractors registered under the scheme and is at a rate of 20%.

Higher rate: This deduction is made for sub-contractors that have not registered under the scheme and is at a rate of 30%.

To determine which rate should be applied the contractor must obtain basic identification details from sub-contractors, such as name, taxpayer reference number and national insurance number and must verify the status of their sub-contractors with HMRC, either by telephone or online. The deduction is made from the amount owed to the sub-contractor but will not include monies owed for materials or VAT.

Example:
Peter is a sub-contractor and has invoiced Kevin (contractor) as follows;
Labour: £500

VAT: £100
Materials: £200

Kevin has assessed Peter’s tax status and he needs to make a deduction at the normal rate of 20%. The VAT part of the invoice and the materials part of the invoice do not have a deduction made, but there will be a deduction of 20% of the £500 for labour (£100). Kevin therefore has to pay Peter £700.

A contractor must provide a written statement to every sub-contractor from whom a deduction is made within 14 days of the end of each tax month.

Can a Sub-contractor be Paid in Full Without a Deduction?

Sub-contractors are able to apply to be paid gross, i.e. with no deductions applied, provided they can satisfy HMRC of certain criteria:

  • You need to prove you carry out construction work in the UK.
  • Your VAT exclusive turnover in the last 12 months must be over £30k for sole traders, each director of a limited company or for each partner of a partnership, or at least £100K for the whole partnership or company
  • You’ve paid your tax and NIC on time in the past.
  • Your business is run through a bank account.

 

If a sub-contractor qualifies then the contractor will not need to make a deduction and the sub-contractor will be paid in full. The sub-contractor will therefore not have tax payments building up on account and will need to pay their full tax liability when they have filed there end of year accounts.

​CIS Tax

A contractor must submit an online tax return (CIS300) to HMRC no later than 14 days following the end of the tax month, i.e. 19th, detailing all payments and deductions that have been made to sub-contractors. Failure to do so will result in a penalty. This return will need to include the following information:

  • Details of the contractor
  • Payments and deductions made
  • A declaration that the employment status has been considered
  • A declaration that the contractor has verified that the sub-contractor is or isn’t registered for the CIS

 

Where no payments have been made to sub-contractors in a particular month the contractor must notify HMRC by the 19th of the following month as failure to do so may result in a penalty.

The contractor will need to make payment for the amounts deducted every month or quarter (if average payments under PAYE and CIS tax are less than £1,500 a month). These payments must reach HMRC by the 22nd of the month if the payment is electronic, or the 19th if the payment is made by post. They will also need to supply the sub-contractor(s) with payment and deduction statements as well as keeping records of this themselves.

Checking the Employment Status of a Sub-contractor

A contractor who is engaging sub-contractors that are operating as a sole trader must check the employment status of the sub-contractor. They can do so using the employment status indicator (ESI) tool. This is a free tool that can be found on the HMRC website. This tool involves answering a few questions following which HMRC provides the employment status of the sub-contractor with the option to download a PDF result. Sub-contractors are also able to use the ESI tool to determine their own status.

Provided information has been entered accurately, then the results of the ESI tool can be relied upon if challenged by HMRC in the future.

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