Spotlight On: Understanding the Construction Industry Scheme (CIS)

A GUIDE FOR CONTRACTORS AND SUBCONTRACTORS

The Construction Industry Scheme (CIS) is a vital part of the tax system for workers in construction. Whether you’re a contractor managing subcontractors or a subcontractor working on various projects, understanding how CIS works is key to ensuring compliance and managing cashflow effectively. In this guide, we’ll break down the essentials of CIS, covering who it applies to, how it operates, and the key responsibilities involved.

WHAT IS THE CONSTRUCTION INDUSTRY SCHEME?

The CIS is a tax deduction system designed to ensure subcontractors in the construction sector pay the correct amount of tax. Under the scheme, contractors deduct money from subcontractors’ payments and pass it to HMRC. These deductions are advance payments towards the subcontractor’s tax and National Insurance. CIS applies to a broad range of construction work carried out in the UK, including site preparation, building work, repairs, decoration, and demolition. However, it doesn’t cover all work, so it is important to confirm whether specific activities fall under the scheme.

WHO DOES CIS APPLY TO?

CIS applies to two primary groups within the construction industry:
1. Contractors Contractors are businesses or individuals who pay subcontractors for construction work. This includes companies or individuals who spend more than £3 million annually on construction projects, even if construction isn’t their primary business.
2. Subcontractors Subcontractors are businesses or individuals that carry out construction work for a contractor. This group includes sole traders, partnerships, and limited companies. If you fall into either category, you need to be aware of your responsibilities under CIS and how it impacts your tax obligations.

KEY RESPONSIBILITIES FOR CONTRACTORS

As a contractor under CIS, you have several obligations to ensure compliance with HMRC’s requirements:
• Registration: Register with HMRC as a contractor before engaging subcontractors. Failing to do so could result in penalties.
• Verification of subcontractors: Before paying a subcontractor, you must verify their status with HMRC. This determines whether to deduct tax at the standard rate (20%), a higher rate (30%) for unverified subcontractors, or make no deductions for those with gross payment status.
• Deductions: Deduct the appropriate amount from payments for subcontractors and submit these to HMRC. Record-keeping: Maintain detailed records of payments, deductions, and verification checks.
• Monthly returns: Submit a monthly CIS return to HMRC detailing all payments and deductions made to subcontractors. Ensure accuracy to avoid penalties.

KEY RESPONSIBILITIES FOR SUBCONTRACTORS

Subcontractors also have duties under CIS to ensure their tax affairs are in order:
• Registration: Register with HMRC as a subcontractor to avoid higher-rate deductions. Registration can be done online or by phone.
• Gross payment status: If you meet the criteria, you can apply for gross payment status, allowing you to receive full payments without deductions. This is particularly beneficial for subcontractors with significant expenses.
• Record-keeping: Under CIS, keep track of all income and deductions. This helps with tax returns and ensures you don’t pay more tax than necessary.
• Filing tax returns and offsetting CIS deductions:
• If you’re self-employed, you’ll typically offset CIS deductions against your personal tax liability on your self assessment tax return.
• If you operate through a limited company, you can offset CIS deductions against your PAYE liabilities or corporation tax.

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