The Construction Industry Scheme (CIS) is a tax deduction scheme run by HMRC. It affects most contractors and sub-contractors in the construction industry and seeks to ease some of their administrative burdens. If you are new to this business, you will likely have questions about exactly how it works, though, which is why we have put together this guide to help you understand the basics:
What is CIS and how does it work?
The CIS is a scheme that defines rules around the payments made from contractors to sub-contractors and the processes that must be followed in that context. It provides for income tax, National Insurance (NI) contribution schemes and other relevant deductions to be done automatically at the source – before the sub-contractor gets their paycheck. The goal is to ensure that HMRC receives tax and NI payments upfront while making things easier for the sub-contractor.
CIS accounting services comprise most construction and allied activities related to buildings, from preparing the site to refurbishment. There are certain exceptions too, such as for architects and surveyors who do not participate directly in construction. Other exceptions include:
- Materials manufacture
- Materials delivery
- Scaffolding hire
- Carpet fitting
Who needs to be CIS registered?
Complete details of whether or not you are required to enrol under CIS can be found on the HMRC website. Briefly, though, if you use sub-contractors or your business spends at least a million pounds on construction over three years, you must mandatorily register for CIS. Here is how you can do so:
- The first step is to register as an employer under HMRC. You can do this online.
- After registration, you will get a PAYE reference, and an accounts office reference that you can use to register for CIS.
- If you are already registered as an employer, HMRC will use your PAYE reference to update your CIS status.
- When registering under CIS, choose the option that states that you will have sub-contractors. Your business will then automatically be reminded to make CIS payments every month starting from the registration date.
- Tax deductions for your sub-contractors need to be paid monthly or quarterly. These are deemed advances on NI contributions and income tax.
- If your sub-contractors are registered in the UK, have been timely with previous tax payments, and their business makes a minimum turnover of £30,000, they could be eligible for gross payment. In this case, no deduction is made at the source. This could be useful for sub-contractors who need cash on hand to make payments.
- If you are a sub-contractor, you do not need to register for CIS, but there are tax benefits to doing so. Tax deductions on your labour, for instance, are 30% if you are not registered but only 20% if you are.
- HMRC will calculate and communicate any outstanding tax and insurance contribution balances at the end of the tax year.
Rules for contractors and sub-contractors to remember
As a contractor, there are some clear rules you need to adhere to under CIS:
- You first need to check whether your sub-contractors are registered with HMRC. This will determine how much tax deduction you make when you pay them – 30% if non-registered, 20% if registered or a gross payment if eligible.
- All sub-contractors must receive statements of their payments and applicable deductions.
- You must send reports to HMRC each month on sub-contractor payments and deductions. You also need to keep complete records of everything.
- Ensure that no materials or VAT are included in the calculations – the CIS rules only cover sub-contractor labour.
- All payments, returns and reports must be completed within 14 days after the end of each month. The CIS return period runs from the 6th of one month to the 5th of the next, with the submission deadline being the 19th. If you are paying through electronic methods, you get an extra three days to pay.
- If you are unsure what you qualify as or which rules apply to you, contact HMRC or an accountant as soon as possible so that you do not inadvertently make mistakes. For instance, penalties for entering the wrong employment status for a sub-contractor can go up to £3,000.
If you are a sub-contractor, here is what you need to remember:
- You qualify as a sub-contractor if you have a limited company that does work for contractors or are self-employed in the construction industry.
- You can register online with HMRC. There are different forms to complete depending on whether you are a sole trader or a limited company.
- Ensure that your contractor gives monthly statements on the deductions paid to HMRC. Keep these statements safe in case any discrepancy arises later.
- The tax deduction will be set off against any extra tax amount you owe or paid back to you if you owe less.
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Let Bradleys Accountants ease your CIS worries
Our expert accounting and tax support make CIS compliance stress-free for contractors and sub-contractors. Focus on growing your construction business with peace of mind. Enjoy hassle-free business operations. Let us handle your CIS accounting needs with our comprehensive services:
- CIS registration, sub-contractor employee status advice, record and payroll management
- Deductions and payment calculations based on sub-contractor setup
- UTR number acquisition, insurance procurement, cloud expense management
- Sub-contractor verification with HMRC and deduction rate advice
- Monthly CIS returns filing, notification of tax payable to HMRC
Over to you
In conclusion, CIS is a comprehensive HMRC scheme that covers the obligations of both contractors and sub-contractors. Remember that the same individual could qualify as both and must follow the CIS guidelines accordingly.
It can get complicated to know precisely what to do and when, which is why we recommend working with a professional accountant like us who is well-versed in CIS rules. We are an ACCA-member firm and love using QuickBooks and Xero to manage client finances efficiently.
When you sign up with us, you will be assigned a dedicated accountant who will be your point of contact for any queries you might have. Tell us about your CIS-related woes by filling out this contact form.