What is the Construction Industry Scheme (CIS)?
What is CIS in construction? Quite simply, it’s a scheme created by HM Revenue and Customs (HMRC) to set out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry and certain other businesses.
How does CIS work ?
The simple answer to the question:
Under the scheme, contractors deduct money from a subcontractor’s payments and pass it directly to HMRC (This does not apply to any payments relating to material costs). The deductions then count as advance payments towards the subcontractor’s tax and National Insurance.
CIS allows subcontractors to make regular contributions towards their national insurance and tax obligations
Importantly, Contractors must register for the scheme. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they don’t.
Who’s included in the scheme?
Anybody who works in the UK construction industry (from builders and labour agencies to property developers and gangmasters) is required to comply with HMRC’s Construction Industry Scheme.
What is a contractor within the CIS?
Contractors are companies that a client hires directly to complete a construction project.
When should contractors register under the CIS?
You must register as a contractor with the Construction Industry Scheme (CIS) if:
- you pay subcontractors to do construction work
- your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment
Once you’ve registered, your business must file monthly CIS returns for HMRC. You must verify with HMRC every subcontractor you use, and the verification process determines the level of tax you must deduct from the service they provide to you.
As a registered contractor, you also have an obligation to provide subcontractors with proof of any deductions you make.
What is a subcontractor under the CIS?
A subcontractor is generally a self-employed person, partnership, or ltd company providing services to a contractor.
A subcontractor doesn’t have to be CIS registered – however if they don’t, the withheld amount for CIS is at the higher rate of 30%, not 20%
The difference between a Contractor and Subcontractor?
What work is covered under the CIS?
CIS covers most construction work to a permanent or temporary building or structure, and civil engineering work like roads and bridges.
For the purpose of CIS, construction work includes:
- preparing the site (laying foundations and providing access works)
- 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
What are the CIS Exceptions?
You do not have to register if you only do certain jobs, including:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that’s clearly not construction – for example, running a canteen or site facilities
There are some jobs you don’t have to register for. This CIS guide for contractors and subcontractors has more information on what’s covered / not covered by the scheme.
Business based outside the UK?
The same CIS rules apply if your business is based outside the UK, but you do construction work as a contractor or subcontractor in the UK. Read more about how to register and pay tax if this applies to you.
What must you do as a Construction Industry Scheme (CIS) contractor?
If you’re a mainstream contractor and you pay subcontractors, or if you use a flexible workforce, then you need to register as a contractor for the Construction Industry Scheme (CIS).
To register as a contractor, you need to follow the process outlined by HMRC. You will need your UTR (Unique Taxpayer Reference) number, supplied to you when you have registered for self-assessment.
When done, you’ll get a letter from HM Revenue and Customs (HMRC) with the information you need to start working as a Construction Industry Scheme (CIS) contractor.
- You must register for CIS before you take on your first subcontractor.
- You must check if you should employ the person instead of subcontracting the work. You may get a penalty if they should be an employee instead.
- Check with HM Revenue and Customs (HMRC) that your subcontractors are registered with CIS.
- When you pay subcontractors, you’ll usually need to make deductions from their payments and pay the money to HMRC. Deductions count as advance payments towards the subcontractor’s tax and National Insurance bill.
- You’ll need to file monthly returns and keep full CIS records – you may get a penalty if you do not.
- You must let HMRC know about any changes to your business.
What must you do as a subcontractor within the CIS?
If you are a subcontractor, you should register for the Construction Industry Scheme (CIS) if you work for a contractor and you’re one of the following:
- a sole trader
- the owner of a limited company
- a partner in a partnership or trust
How do CIS deductions work?
Under the CIS, a contractor must deduct a percentage from your payments and pass it to Her Majesty Revenue and Customs (HMRC). The deductions are determined by the status of the subcontractor relayed by HMRC to the contractor.
These deductions count as advance payments towards your tax and National Insurance bill.
There are 3 different statuses’ a subcontractor can have:
- Registered for CIS = 20% (Net)
- Not registered for CIS = 30% (Higher rate)
- Gross Status = 0%
What is Gross payment status?
There are certain criteria you will need to meet and be able to evidence to gain Gross payment status shown in link above.
NB: You do not need to register for CIS if you’re an employee. Check your employment status if you’re not sure.
Managing CIS responsibilities - what are the risks for you?
Contractors who do not comply with the CIS conditions can receive high penalties, they could also lose their gross payment status, which in turn can effect business cashflow.
HMRC will automatically charge you a penalty as soon each return is one day late. They will then continue to charge at two, six and twelve month increments.
Later than six months will incur an automatic charge of £300 or 5% of any liability to make payments that should have been shown on the return, whichever is higher.
Further than twelve months late a ‘higher’ penalty or the percentage rate may be applied.
HMRC will do this if:
- you failed to file the return and you knew that you had deliberately withheld information
- you took action to conceal the withholding of information from us
If you have not registered with the CIS, you will receive a notice and a penalty assessment of your business will take place.
The Indigo Group successfully work as CIS compliance specialist for a wide range of businesses.
Managing CIS status and avoiding tax and late payment problems
The Indigo Group can remove the risk for both contractors and subcontractors by directly engaging a workforce, managing their CIS status, and taking full responsibility for deductions and payments to HMRC. This helps contractors and subcontractors avoid the minefield of misunderstood employment status, compliance, and issues with late payments
A smart and safe way to subcontract.
The Indigo Group provides honest, straightforward, commercial contracting solutions for Construction. Subcontractors are our responsibility, and we ensure that workforces are compliant and totally transparent.
Through our MyIndgo platform, we manage everything from right to work, anti-money laundering and modern slavery. We also verify with your business and the subcontractors with HMRC and create a setup, to regularly email and text updates. We also provide weekly payment certificates and annual statements of earnings to help keep self-assessments simple, safe and hassle-free.
The Indigo Group helps contractors and subcontractors to work in a safe and legal way.
By stepping into the contractual chain, the Indigo Group saves contractors time and money and enables them to work with subcontractors on a long-term basis in a way that’s effective, legal and safe.
How does it work?
Indigo engages subcontractors directly (verifying them with HMRC) and takes full responsibility for their self-employed status. As a Commercial Contractor (sitting directly in the contractual chain) Indigo then manages the direct link between contractors and subcontractors.
Clear and Compliant Contracting
Indigo’s Contract solution protects businesses from employment status and tax risk and removes the administrative hassle of CIS with a tried and tested 5-step action plan.
Indigo reviews contracts, operating practices, and CIS processes
Indigo engages directly with subcontractors in a legally compliant manner
Indigo assesses all subcontractors for their right to work
Indigo verifies subcontractors with HMRC for CIS tax status
Indigo manages weekly CIS and subcontractor payments