Understanding CIS Compliance
What is the Construction Industry Scheme (CIS)?
An Overview of the Construction Industry Scheme (CIS)
What is CIS?
Overview of the Construction Industry Scheme
The Construction Industry Scheme (CIS) was established by HMRC to ensure subcontractors in the UK construction industry pay the correct taxes and to protect them from false employment practices. Under this scheme, registered contractors deduct money from subcontractor payments and send it to HMRC as an advance payment towards the subcontractor’s National Insurance and tax.
Who Needs to Register?
According to HMRC, you must register as a contractor under the CIS if:
• You pay subcontractors to carry out construction work for you.
• You have spent more than £3 million on construction work in a 12-month period since your first payment, even if your business is not construction-based.
Your company status does not matter; you might be a sole trader, in a partnership, or have a limited company. You must register for CIS before employing your first subcontractor.
If you subcontract your services and also employ subcontractors, you should register as both a contractor and a subcontractor and follow the relevant rules for each scenario. Many firms use accountants and CIS accounting software to efficiently handle CIS invoices and deduction statements.
What is CIS?
What Does CIS Cover?
HMRC defines construction work as including:
• Permanent or temporary buildings or structures
• Civil engineering work like roads and bridges
This includes:
• Site preparation, such as laying foundations and providing access
• Demolition and dismantling
• Building work
• Alterations, repairs, and decorating
• Installing systems for heating, lighting, power, water, and ventilation
• Cleaning the inside of buildings after construction work
Some exceptions apply, so check the full criteria on the HMRC website before registering.
CIS Deduction Rates
There are three possible CIS deduction rates:
• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% for subcontractors with ‘gross payment’ status, where the contractor pays them in full, and the subcontractor is responsible for their tax and National Insurance via their Self Assessment tax return.
Gross Payment Status
To qualify for gross payment status, you must:
• Be tax compliant (i.e., have paid your tax and National Insurance on time).
• Have a construction-based business in the UK.
• Have a business bank account.
Additionally, you must pass a turnover test, demonstrating a certain level of turnover excluding raw materials and VAT:
• £30,000 or more for sole traders.
• £30,000 for each partner in a partnership or a minimum of £100,000 for the whole partnership.
• £30,000 for each director of a company, or a minimum of £100,000 for the entire company.
If your company is controlled by five people or fewer, your annual turnover must be at least £30,000 for each of them.
What is CIS?
Frequently Asked Questions
Who Counts as a Contractor or Subcontractor?
A contractor hires a subcontractor to provide a service or product. A company can act as both a contractor and subcontractor and must register as both with HMRC.
What Are Contractors’ Responsibilities?
As a registered contractor, you must verify subcontractors with HMRC, calculate applicable deductions, make net payments, record details, and provide deduction statements. You must also submit monthly CIS returns and send CIS payments to HMRC.
What is the Difference Between PAYE and CIS?
CIS involves a fixed 20% deduction for most subcontractors. PAYE involves tax codes and variable tax rates depending on income levels.
Are CIS Tax Rates the Same as Self-Employed?
You only pay tax under CIS if you are self-employed. Employees have PAYE status and do not need to file a tax return.
Does CIS Apply to Sole Traders?
Yes, CIS applies to all business types, including sole traders.
Can You Claim CIS Back?
You may be able to claim a refund if you have overpaid tax. CIS does not account for your Personal Allowance, so many self-employed subcontractors receive a rebate.