Construction businesses using the Construction Industry Scheme (CIS) need to deduct money from a subcontractor’s payments. These payments go to HMRC as part of the subcontractor’s tax and National Insurance obligations.
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Unlike most self-employed people, those working in the construction industry for a contractor have money deducted from their payments for tax and National Insurance.
Contractors deduct 20 per cent in subcontractor CIS payments if the subcontractor is registered with the CIS. This increases to 30 per cent if the subcontractor isn’t registered.
Gov.uk says that you need to register as a contractor if either:
You need to register as a subcontractor if:
It’s possible that small businesses will fall under either one – or both – of these categories. If you fall under both, you need to register as both a contractor and a subcontractor.
According to HMRC, all construction work is covered under CIS:
The scheme covers all business structures too, whether they’re companies, partnerships, or self-employed sole traders.
But some jobs aren’t covered, including:
There are some situations in which CIS doesn’t apply if you’re a contractor. Gov.uk says that it doesn’t apply if your work is:
The scheme doesn’t apply to deemed contractors paying for:
As a contractor, you need to register for CIS before you take on your first subcontractor.
To register, you need to set up as a new employer with HMRC, who’ll then contact you with the information you need to register as a CIS contractor.
When you set up as a new employer, HMRC will set up a Contractor Scheme for you (and a PAYE Scheme, if necessary).
You need to ‘verify’ subcontractors with HMRC, who’ll then tell you whether they’re registered for CIS (and so which rate you need to make CIS deductions at).
If you’ve worked with a subcontractor before but haven’t included them on a CIS return in the last two tax years, you need to verify them again.
You need details including your Unique Taxpayer Reference (UTR), your HMRC accounts office’s reference number, and your HMRC employer reference.
You also need your subcontractor’s UTR, as well as their National Insurance number, if they’re a sole trader. For limited companies, you need their company name, company UTR and registration number. For partnerships, you need their nominated partner details, trading name, and partnership UTR.
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:
Then you make CIS deductions from that amount (at 20 or 30 per cent – although some subcontractors may have ‘gross’ CIS status, meaning there won’t be any CIS deductions).
After paying subcontractors, you have to give them a payment and deduction statement within 14 days of the end of each tax month.
You need to pay the CIS deductions to HMRC by the 22nd of each month through the CIS scheme they set up for you when registering, otherwise you could be charged interest and penalties.
It’s important to keep accurate records of the gross amount invoiced by subcontractors, expenses, and deductions. You have to keep these for three years after the end of the tax year they relate to – if you can’t show your records to HMRC when asked, you might be fined £3,000.
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).
If you haven’t made any payments to subcontractors in a particular month, you still have to tell HMRC (you can do this using your online account).
If you’ve stopped using subcontractors temporarily, you can make an inactivity request by contacting HMRC. This lasts six months.
You’ll also have to let HMRC know if:
While it’s not strictly mandatory to register for CIS as a subcontractor, keep in mind that registered subcontractors will have CIS deductions made at 20 rather than 30 per cent.
You may also be able to apply for ‘gross’ payment status, meaning your contractor won’t make CIS deductions at all. You might qualify if:
You also have to meet a minimum turnover amount. HMRC will review gross payment status each year, so it’s important to keep up with the conditions of the scheme (like meeting tax deadlines).
You need these details:
The process is different depending on your legal structure:
Your contractor needs to verify you first, 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 per cent rate.
Your contractor needs to give you your CIS statements within 14 days of the end of each tax month. These help you work out whether you still owe tax and National Insurance – or whether you’re due a refund.
You can have some expenses on your invoice that the contractor will deduct from your gross payment before CIS deductions:
It’s important to keep accurate records for your tax return.
As your CIS deductions go towards your tax and National Insurance, this affects your overall tax liability.
Sole traders and partners who pay tax through Self Assessment should 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 limited companies, who can claim back CIS deductions through the monthly payroll scheme.
You have to tell HMRC about certain changes to your business, particularly if your business structure changes. You also need to tell them about changes to your trading name, addresses, and shareholders – and be sure to let them know if you’ve stopped trading.
Please only use this guide as an overview of the Construction Industry Scheme (CIS). HMRC has a lot more information on the scheme, as well as a dedicated CIS guide on its intricacies. It’s worth looking at this if you’re not sure about anything.
Keep in mind that there were a number of changes introduced to the CIS on 6 April 2021, designed to tackle abuse of the system. An HMRC policy paper describes these changes in detail.
What else would you like to know about the Construction Industry Scheme? Let us know in the comments below.
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