Guide to the Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) is an important component of the UK's tax system, primarily designed to regulate tax payments within the construction industry. For both contractors and subcontractors operating in this sector, it is essential to understand the complexity of CIS to ensure compliance with tax obligations and avoid potential penalties.

Under the CIS scheme, self-employed individuals working in the construction industry as a contractor have money deducted from their payments for tax and National Insurance.

Contractors deduct 20% in subcontractor CIS payments and pass it to HMRC if the subcontractor is registered with the CIS. This amount increases to 30% if the subcontractor isn’t registered.

The scheme was introduced to achieve two objectives: to reduce levels of fraud and tax evasion in the construction industry, and to help subcontractors spread their tax liabilities over the financial year.

What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme, commonly known as CIS, is a taxation scheme established by HMRC in the United Kingdom. It applies if you work for a contractor in the construction industry for example as a self-employed individual but not as an employee. It was introduced to tackle tax evasion within the construction industry by ensuring that taxes are accurately collected from subcontractors and contractors.

Who Needs to Register for CIS?

If you’re a contractor, you need to register for the CIS scheme if:

• You pay subcontractors for 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
  

If you’re a subcontractor, you need to register if:

• You perform construction work for a contractor.
  

As a small business owner, there may be instances where you meet the conditions of both categories. If that’s the case, you need to register as a contractor and subcontractor.

Benefits of the Construction Industry Scheme (CIS)?

1. Reduces Tax Liability: CIS allows subcontractors to have tax deducted at source, simplifying their tax obligations and helping them manage their tax liability more effectively.
2. Ensures Legal Compliance: CIS regulations ensure that both contractors and subcontractors operate within the law, reducing the risk of legal issues and penalties.
3. Promotes Fair Payment Practices: CIS encourages fair payment practices by requiring contractors to deduct tax before making payments to subcontractors, preventing non-payment or underpayment issues.
4. Facilitates Access to Work: Registered subcontractors may find it easier to secure jobs within the construction industry, as many contractors prefer to work with registered subcontractors.

Types of Work Covered by CIS 

CIS covers the following types of work:

• Alterations
• Building work
• Decorating
• Demolition or dismantling
• Installation of heating, lighting, power, water and ventilation
• Repairs
• Site preparation
  

Who is exempt from CIS?

If your construction work falls under any of the following categories, you do not need to register for CIS:

• Architecture and surveying
• Scaffolding hire (with no labour)
• Carpet fitting
• Delivery of materials
• Work on construction sites that isn’t related to construction, like running a canteen or site facilities
  

The scheme covers all types of business structures, such as limited companies, partnerships and sole traders.  

Exemptions

There are circumstances where CIS doesn’t apply to contractors, such as:

• Your work is paid for by a charity or trust
• Your work is paid for by a governing body or head teacher of a maintained school on behalf of the local education authority
• Your work is done on the subcontractor’s own property and worth less than £1,000, excluding materials 
  

It doesn’t apply to deemed contractors paying for:

• Work on property (that isn’t for sale or rent) for your own business
• A construction contract worth less than £1,000 excluding materials 

CIS Deductions for Contractors

As a contractor, you need to do the following: 

• Register for CIS as a contractor
• Verify subcontractors you work with with HMRC
• Make CIS deductions when you pay subcontractors
• Keep proper records
• File CIS monthly returns
  

1. Register for CIS

First, you need to set up as a new employer with HMRC. You’ll then be provided with information you need to register as a CIS contractor.

2. Verify subcontractors with HMRC

You’re required to verify subcontractors with HMRC. You’ll be informed as to whether a subcontractor is registered for CIS, so you know which rate deductions should be made at. 

The verification can be made using HMRC’s online service or commercial CIS software. Using the commercial software is mandatory if you’re verifying 50 or more subcontractors.

When paying your subcontractor, you need to make CIS deductions at the rate HMRC told you when verifying them.

You start with their gross payment (the total of their invoice), then take away the subcontractor’s expenses, including:

• VAT
• Materials
• Equipment which is now unusable (‘consumable stores’)
• Fuel used, except for travelling
• Equipment hired for this job (‘plant hire’)
• Manufacturing or prefabricating materials
  

Then you make CIS deductions from that amount. After paying subcontractors, you have to give them a payment and deduction statement within 14 days of the end of each tax month.

3. Keep proper records

You need to keep accurate records of gross payments, cost of materials, tax deducted and any verification numbers. You have to keep these for three years after the end of the tax year they relate to.

4. File monthly returns

You’re required to tell HMRC about the monthly payments you make to subcontractors by sending a monthly return. You have to do yours by the 19th of each month, otherwise you’ll get a £100 penalty (which could increase to £3,000 depending on how late you file).

CIS Deductions for Subcontractors

As a subcontractor, you need to do the following:

• Register for CIS as a subcontractor
• Receive payment through CIS
• Keep proper records
• Pay taxes
  

1. Register for CIS

The registration process differs depending on your business structure: 

• Sole traders: Register for CIS online, using your UTR and Goverment Gateway ID and password for Self Assessment (you’ll need to register for Self Assessment if you don’t have these details)
• Limited companies: Fill in this company registration form
• Partnerships: Fill in this partnerships registration form (HMRC will treat this registration separately to the sole trader registration)
  

2. Receiving your payment through CIS

You’ll need to be verified by your contractor, so make sure you give them the same business name you used when registering, as well as your UTR. If you’re not registered, or your contractor can’t verify you, CIS payments will be deducted at the higher 30% rate.

You should received your CIS statements from your contractor within 14 days of the end of each tax month.

3. Keep proper records

You need to keep records of documents that will enable you to complete your tax returns and list the cost of materials.

4. Pay your taxes

As a sole trader and partner paying tax through Self Assessment, you’re required to record the full invoice amounts as income, and then put CIS deductions in the dedicated section.

HMRC will work out your liability–if you still owe tax, you need to pay it by 31 January, but it could also be that HMRC will owe you a refund.

The process is different for if you’re operating through a limited company, as you can claim back CIS deductions through the monthly payroll scheme. You’ll need to complete the following steps:

• Send your monthly Full Payment Submission (FPS) as usual to HMRC.
• Also send an Employer Payment Summary (EPS). Enter the total CIS deductions for the year to date.
• HMRC will take your CIS deductions off what you owe in PAYE tax and National Insurance. Pay the balance by the usual date.

Construction Industry Scheme Changes: April 2021

Last year, HMRC issued a draft legislation introducing four changes to the CIS rules. These changes, targeted at tackling abuse in the construction industry were implemented starting April 2021.

CIS set-off amendment power

Currently some sub-contractor companies are entitled to set CIS deductions suffered during the year against their employer PAYE liabilities. The change of rules allows HMRC to amend the CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns.

Where the sub-contractor employer cannot provide satisfactory evidence to support the CIS deductions claimed (when challenged by HMRC), and then the employer does not amend the CIS entry on their EPS within a certain timeframe, HMRC will instead amend the CIS deduction figure claimed. They will also be able to prevent future claims, where an EPS is not corrected.

Cost of materials

The legislation has also been amended to ensure that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract that the cost in question is not subject to deduction under CIS.

Deemed contractors

Following the changes, a Deemed Contractor will need to monitor the relevant expenditure more regularly and apply the CIS when construction expenditure exceeds £3m within the previous 12 months.

CIS registration penalty

This expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. The change means HMRC can hold the individual or company responsible, where they are able influence or have control over the person making an incorrect or false claim.

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What happens if you don't register for CIS?

Without CIS registration, contractors are legally required to deduct a higher rate of tax i.e 30% from your payments, as opposed to the standard rate currently 20%. So registering for CIS means 10% of tax savings.

How to claim CIS refund online?

If you have paid too much tax or national insurance, you can claim CIS refund online with the below details:

• Company name, phone number, and UK address
• PAYE reference numbers
• Company Unique Tax Reference number (UTR number)
• The estimate of overpaid amount

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