Ever worked in the UK construction industry? Then you might have heard about the Construction Industry Scheme (CIS). So, what is CIS, how does it work, and what impact does it have on your pay?
It is a set of rules created by HMRC to regulate payments between contractors and subcontractors. Like PAYE, CIS also requires contractors to make deductions from subcontractor payments. They are then sent to HMRC as advance payments towards the subcontractor’s tax and National Insurance liabilities.
This article explains what is CIS, how CIS works, who must register, key deadlines, and how to stay compliant.
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What Is CIS, And Why Was It Started?
The Construction Industry Scheme (CIS) is a UK tax deduction scheme for the construction industry. Under the CIS, contractors deduct money from a subcontractor’s payments and pass it directly to HMRC.
The purpose of the scheme is to reduce tax evasion by self-employed subcontractors and ensure they pay their taxes throughout the year, rather than as an annual payment.
The CIS was introduced first in 1971 to counter widespread tax evasion in the construction industry. Historically, the construction sector had a high number of mobile, self-employed workers who were often paid in cash and failed to report their earnings.
How Does CIS Work?
After understanding what is CIS, let’s discuss how CIS works. This process involves both contractors and subcontractors registering with HMRC and following rules for payment and reporting.
Registration and Verification
- A contractor is obliged to register with HMRC for CIS where they pay subcontractors for construction work. This also applies if their business is not a construction one and he spends over £3 m on construction in any 12 months.
- Subcontractors are allowed to register, though it is not compulsory. In any case, their tax deduction rate will be lower upon registration.
- Where the contractor pays a new subcontractor, he must verify the subcontractor’s registration status with HMRC. It will then inform the contractor of the correct deduction rate to apply.
Payment And Deductions
Whenever any contractor pays any subcontractor, the provisions relating to deduction would apply:
- Registered Subcontractors: A deduction at the standard rate of 20% is made from the labour element of the payment.
- Unregistered Subcontractors: A 30% higher deduction is made.
- Gross Payment Status: Subcontractors who satisfy specific criteria, for example, a good tax compliance history with adequate turnover, apply to HMRC for “gross payment status”.
In this case, the contractor can make full payments to the subcontractor (0% deduction), and subsequently, the latter is responsible for their tax and National Insurance, wholly paid at the end of the year.
Reporting And Record Keeping
- Contractors must provide the subcontractor with a “payment and deduction statement” (similar to a payslip) for each payment, showing the amounts paid, materials costs, and the tax deducted.
- Contractors must also submit a monthly return to HMRC detailing the payments made to subcontractors, stating the deductions made.
- Subcontractors should retain these statements and use them when they complete their annual Self-Assessment tax return or Corporation Tax return if a limited company.
Who Needs To Register For CIS?
Once you understand what is CIS, let’s discuss who needs to register it. If you are a contractor or a subcontractor, you are entitled to register for CIS under certain conditions. They are explained in detail below:
Register As a Contractor
You must register for CIS as a contractor with HMRC if you are involved in the construction business and are paying subcontractors for work. This can include:
- Mainstream contractors: The businesses which carry out and pay for construction work as their main activity. This includes builders and property developers.
- Deemed contractors: Businesses whose main activity is not construction, but expenditure on construction exceeds £3 million within the 12-month rolling period since the first payment.
Register As a Subcontractor
If you carry out work for a contractor, it means you are a subcontractor. The registration for subcontractors is optional, yet it has some major financial implications:
- If you register, then the contractors deduct tax at the standard rate of 20% from the labour portion of your payments.
- If you do not register, then contractors must deduct tax at a higher rate of 30% from your payments.
Subcontractors can also apply for the “gross payment status”. This allows them to be paid in full if they meet the specific criteria. This includes a good tax compliance history and a minimum annual turnover threshold. For example, the turnover threshold is £30,000 for a sole trader.
What Happens If You Do Not Register For CIS?
After knowing what is CIS, you should know the consequences if you do not register it.
For Contractors
- Contractors who do not register can face significant penalties, including fines for failing to keep CIS records and an automatic £100 fine for each late monthly return.
- If HMRC discovers that an unregistered contractor has paid subcontractors without making deductions, the contractor can be held liable for the unpaid tax. This will also include interest and further penalties.
- The risk of financial ruin can be substantial and, for non-limited companies, can put the contractor at personal risk.
- Non-compliant contractors may face stricter HMRC audits.
For Subcontractors
- If you are an unregistered subcontractor, contractors must deduct tax from your payments at the higher rate of 30% instead of the standard 20%.
- The higher deduction rate can negatively impact your cash flow.
- If an unregistered subcontractor also fails to file a Self Assessment tax return, they may lose the ability to reclaim overpaid CIS deductions. This can result in paying tax twice and facing estimated tax bills from HMRC.
- If you are unregistered and don’t file tax returns within three years, you may lose the ability to claim a refund for any overpaid tax.
What Are The Benefits Of CIS?
After you have registered for CIS, let’s talk about its benefits.
For Contractors
- For contractors, ensuring compliance is necessary as it provides a structured process for handling subcontractor payments and taxes. Helping contractors comply with HMRC regulations and avoid penalties.
- By following the rules, risk is reduced for contractors if a subcontractor fails to declare income properly.
- Operating within the CIS shows that a business is professional and reliable, which can help secure more contracts.
For Subcontractors
- If tax is being deducted throughout the year, subcontractors spread the cost of their tax and National Insurance liabilities. This prevents a large, unexpected tax bill at the end of the year.
- Many subcontractors overpay tax through the scheme. At the end of the tax year, they claim a refund, which can be a welcome cash boost.
- Choosing to register for CIS results in a lower 20% deduction rate compared to the 30% for unregistered subcontractors, which can improve cash flow.
- Those with a strong history of tax compliance, obtaining Gross Payment Status, provide total control over their cash flow, as no tax is deducted from payments.
- Being CIS-registered increases a subcontractor’s credibility and makes them more attractive to larger contractors who prioritise compliance.
How To Cancel Or Deregister From CIS?
After you register for CIS, to cancel your registration or deregister from CIS, you must contact HMRC.
- If you have stopped working as a contractor or subcontractor, then contact HMRC as soon as possible.
- Call the CIS helpline to notify HMRC that you have stopped working as a contractor or subcontractor.
- If you are a contractor, then you must continue to file monthly CIS returns until HMRC approves your cancellation.
- As a limited company acting as a contractor, you should also call the helpline, as online agent access for deregistration may not be available.
- Ensure all final returns have been submitted and any outstanding payments have been made up to the date you stopped working.
What Are The Key Dates For CIS Tax Deductions?
After you know what is CIS, you should also understand its key deadlines.
- The monthly CIS returns are due by the 19th of each month, made in the previous tax month.
- The monthly payments to HMRC are due by the 22nd if paying electronically or the 19th if paying by post.
- Contractors must provide payment and deduction statements to subcontractors at the time of payment or shortly afterwards.
- The Nil returns are required by the 19th if no payments were made to subcontractors in the month.
How Can You Choose The Right CIS Accounting Software?
Since you know what is CIS, understanding which accounting software to use for it is also necessary. Here are some features to keep in mind while choosing it.
- Subcontractor Verification: Automates checking subcontractor details with HMRC.
- Automated Deductions: Calculates the correct tax deduction (20% or 30%).
- Monthly Returns: Simplifies and enables one-click filing to HMRC.
- Payment Statements: Generates and sends payment and deduction statements to subcontractors.
- Invoice & Labour Tracking: Organises invoices, tracks labour vs. materials, and integrates with payroll/VAT.
Bottom Line
By concluding this topic, we understand what is CIS, who needs to register for CIS, and other aspects. All in all, you also got the idea on how does CIS work, so you can avoid penalties and keep your cash flow compliant. Thus, this ensures your business stays on the right track for HMRC.
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Disclaimer: This article intends to provide general information based on the What is CIS.
