Expert guide to the Construction Industry Scheme
The Construction Industry Scheme (CIS) is a legal requirement for contractors to deduct tax from payments made to some subcontractors for work done on "construction contracts". These tax deductions are paid to HMRC by the contractor, and reclaimed by the subcontractor in their year end tax and National Insurance.
Who does CIS apply to?
The scheme applies to all contractors and subcontractors working within the UK construction industry, whatever their business structure. It doesn't just apply to traditional builders - many non construction businesses such as property developers, local authorities and housing associations are also included within CIS.
What type of work qualifies
Construction work includes:
- Site preparation and groundwork.
- General construction work (trades such as bricklaying, plastering and roofing).
- Repairs and alterations.
- Demolition and dismantling.
Who is considered a contractor
Those who pay subcontractors for construction work. Any business that spends £1m or more per annum on construction work within the UK over a three year period is within scope. It doesn't matter whether the business is incorporated or unincorporated. Private householders are never counted as contractors.
Who is considered a subcontractor
The definition of subcontractor doesn't just refer to self employed tradesmen. Any business, however structured, that's taking payment from the contractor is classified as a subcontractor. It doesn't apply to payments between the contractor and their employees. Employees already have Income Tax and National Insurance Contributions taken from their salary and wages under PAYE. Note that:
- An agency may be a subcontractor, even though they aren't performing any work themselves. They are a subcontractor if they are receiving payment from the contractor.
- The same building firm may be both a contractor and a subcontractor - e.g. because they have been contracted by a local authority (so are a subcontractor to the local authority) and then subcontract some of the work to others (making them a contractor).
What deductions are made?
Deductions are made at different rates depending on the subcontractor. Some qualify for gross payments (so no deductions are made). Subcontractors that have registered but don't qualify for gross payments have tax deducted at 20%. Those that haven't registered, or who's details can't be matched with HMRC records, have tax deducted at 30%.
The payment should be calculated based on the gross amount paid in the month, after excluding:
- VAT charged by the subcontractor (if they are VAT registered).
- Construction Industry Training Board levy.
- What the subcontractor paid for materials, consumables and plant hire (including any VAT paid if the subcontractor isn't VAT registered).
- The cost of manufacture or prefabrication of materials used in the construction.
Don't deduct the cost of fuel used for travelling or any subsistence costs, even if that has been invoiced for separately.
What's involved for contractors?
Reviewing employment status
Contractors are responsible for reviewing the employment status of their subcontractors and satisfying themselves that they shouldn't be treated as employees. Determining employment status is a complex area with substantial case law. Criteria that would support treating a worker as a subcontractor rather than an employee include:
- Providing their own equipment beyond what is to their trade.
- Providing and using their own materials.
- Providing and making use of additional workers to complete the job.
HMRC is increasingly pushing to reclassify as many subcontractors as possible as employees. We always recommend contacting your accountant for professional advice.
The contractor is responsible for contacting HMRC and checking whether to pay their subcontractors:
- Gross (i.e. paying the full invoice amount without any tax deduction).
- After taking a standard rate deduction of 20%.
- After taking a higher rate deduction of 30%.
It's important to get accurate details from your subcontractors, so that you can make the right deductions. Inaccurate information will result in you having to take the higher 30% rate of deductions, making life more difficult for your subcontractors than necessary.
Verification is needed if you're paying a subcontractor for the first time in the last two tax years. HMRC provide a verification number, and it's important to have good systems for obtaining and retaining these numbers.
Monthly Contractor Returns
Contractors have to make a monthly return to HMRC for each tax month (6th of one month to the 5th of the next). The return confirms:
- The employment status of subcontractors has been reviewed.
- The verification process has been completed for all subcontractors.
- All payments made to all subcontractors, and all deductions of tax made from those payments.
Returns can be completed manually or electronically, but have to be submitted within 14 days of the end of the tax month. This is the case even if contractors are entitled to make quarterly PAYE returns. As for PAYE, a nil return must be submitted even if no payments were made in that tax month.
Paying the deductions to HMRC
All deductions made from subcontractors in a given tax month (6th of one month to the 5th of the next) must be paid within 19 days (for manual payments) or 22 days (electronic payments). If you're both a contractor and subcontractor and have had subcontractor deductions made against you, these can be set against your liability for PAYE, NI and and contractor deductions so you only pay the net amount.
Providing payment certificates to subcontractors
Contractors have to provide a payment certificate to subcontractors on a monthly basis. This shows the total amount of payments and how much tax, if any, has been deducted. It also has to include data showing the contractor's name and their employer tax reference; the tax month to which the payment relates; the subcontractors name, UTR or specific subcontractor reference; the cost of any materials which have reduced the gross payment and the verification number if deductions have been made at the 30% rate.
It should be made clear to subcontractors that payment certificates aren't payslips, and that the subcontractor has not been classed as an employee.
Penalties for late filing are severe - even missing the deadline by one day will result in a £100 penalty per 50 contractors. The penalty increases to £200 after 2 months, then the higher of £300 or 5% of the deduction at both 6 and 12 months late. Beyond 12 months there is an additional penalty which is the higher of £3000 or 100% of the CIS deduction. There are penalties of up to £300 for failing to provide payment certificates, with a further £60 penalty per day for continuing failure.
What's involved for subcontractors?
Subcontractors should register online with HMRC when they first start working in the construction industry. If this isn't done, or you provide inaccurate details to your contractor, of if your contractor makes a mistake passing your details to HMRC then you'll suffer deductions of 30%.
Gross payment status
In some circumstances they will be entitled to receive payment without their contractor making any tax deductions. To qualify for this "gross payment status" you must:
- Have paid tax and National Insurance Contributions on time in the past.
- Perform construction work or labour in the UK and run your business through a bank account.
- Sole traders must have turnover (excluding VAT) in the last 12 months of at least £30,000.
- Partnerships must have turnover (excluding VAT) in the last 12 months that's the higher of £100,000 or £30,000 per partner for a partnership.
- Companies must have turnover (excluding VAT) in the last 12 months that's the higher of £100,000 or £30,000 per Director for an incorporated business. If controlled by 5 people or less, you must also have turnover of £30,000 for each of them.