What is the Construction Industry Scheme (CIS)?
The construction industry scheme is the process where contractors deduct tax on behalf of their subcontracts and pay them over to HMRC.
What type of work and who are covered?
CIS covers all work in the construction industry in the UK including,
- Site preparation,
- Demolition and dismantling,
- Alteration, repairs and decorating,
- Installing systems for heating, lighting, power, water and ventilation,
- Cleaning inside a building after construction work.
Examples of trades include plumbing & heating engineers, electricians, decorators, etc.
It does not cover,
- Architecture and surveying,
- Scaffolding hire,
- Carpet fitting,
- Production and delivery of materials used in construction.
The scheme applies to companies, partnerships and self-employed individuals based in the UK. If you are a business based outside the UK but do work in the UK, you will have to apply the CIS rules.
Under CIS rules you will either be a contractor, subcontractor or both a contractor and subcontractor.
Contractor
A contractor is a business who employs a subcontractor to do construction work or a deemed contractor if a business spends more than £3million on construction in the last 12 months.
As a contractor you must register for CIS and before you can pay your subcontractor you will need to verify them with HMRC, this will determine the rate of deduction you will need to make.
If the subcontractor is,
- Registered with HMRC, the contractor will have to deduct 20%,
- Unregistered with HMRC, the contractor will have to deduct 30%,
- Registered for Gross Payment, the contractor will not have to make any deductions.
The deduction will be applied to the amount paid to the subcontractor less VAT, materials, equipment hire and fuel.
The contractor will also need to submit a monthly return to HMRC by the 19th of the month and the deductions made will need to be paid to HMRC by 22nd of the month. For example, for the month 06.04.2024 to 05.05.2024, the return will need to be submitted on 19.05.2024 and payment to HMRC by 22.05.2024.
If you there are no deductions for a particular month you will still need to submit a nil return to HMRC, failure to do so will incur a £100 penalty.
Subcontractors
A subcontractor is a business that carries out work in the construction industry for a contractor.
The amount you get deducted from your pay will depend on whether you are registered for CIS, based on the details above, it pays to register as the amount deducted is lower.
The deductions made count as advance payments towards the subcontractor’s tax and national insurance liability. Depending on your business the way you claim for the deductions will be different.
Sole traders and partners
For individuals, when submitting your end of year self-assessment, you will need to record the amount of income you have earned throughout the year and the deductions that have already been made, including CIS deductions. Depending on other income in the year, you will either have some tax to pay to HMRC or if you have overpaid tax, HMRC will refund you the amount overpaid.
Limited Companies
For limited companies, you can claim back your CIS deductions via the company’s payroll scheme. When a company submits their monthly Full Payment Submission (FPS) to HMRC for their payroll, they will need to submit an Employer Payment Summary (EMP) including the total CIS deductions for the tax year to date.
This will either reduce the amount of PAYE they pay HMRC for the month or reduce it to zero. If the PAYE liability has been reduced to zero and there are still CIS deductions not applied, they will be carried forward to next month’s PAYE liability until they have been fully applied. If by the end of the tax year there are still unused CIS deductions, you can apply to have these refunded from HMRC.
Gross Payment Status
As mentioned previously, a subcontractor registered as gross payment status does not need to have their payments deducted for CIS. For individuals, this will mean you are more likely to have to make a payment towards your tax bill at the end of the year and for limited companies, you will not benefit from having to pay less PAYE.
To qualify for gross payment status you will need to,
- Have paid your tax and national insurance on time in the past,
- Your business does construction work in the UK,
- Your business is run through a bank.
In the past 12 months your turnover excluding VAT and materials must be at least,
- £30,000 for sole traders,
- £30,000 for each partner in the partnership, or £100,000 for the whole partnership,
- £30,000 for each director of the company, or at least £100,000 for the whole company,
- Or if the company is controlled by 5 people or fewer, you must have a turnover of £30,000 for each of them.
HMRC will conduct an annual review of the business each year to determine whether you can keep your gross payment status. If you fail the review your gross payment status will be removed. You will have to wait for a year from the date of cancellation before being able to reapply for the gross payment status again.
