The Construction Industry Scheme (CIS) is a taxation regime designed by the government to help tackle tax evasion within the construction industry. Under the CIS, contractors are required to work out the tax requirements of subcontractors and then pay the tax owed on a job direct to HMRC rather than to the subcontractor, who under previous law would have paid the tax to HMRC themselves as part of their tax return.
When a contractor engages a subcontractor, it is now their responsibility to determine whether the subcontractor should be classed as self-employed or employed by the contractor. If the subcontractor is self-employed then the contractor is required to make a deduction from the subcontractor’s pay to cover the CIS tax, and submit this to HMRC as an advance payment of the subcontractor’s tax and National Insurance contributions.
The CIS was brought in since, according to HMRC, there was a significant number of unscrupulous subcontractors who were billing contractors for a total amount which included the tax that they would need to pay, but then not passing this tax on at a later date, changing their business name or address and ostensibly ‘going missing’. By cutting out this middle step of the process, HMRC believes the impact of this type of fraud would be greatly reduced.
When does CIS apply?
If your firm is at all involved in construction, then you may need to register under CIS. The scheme applies to contractors, subcontractors and companies that have a high annual spend on construction even if their business isn’t actually within the construction industry.
When you register under CIS you are required to indicate whether you are a contractor or subcontractor, and within these main categories there are also subdivisions and different terms which define your business.
A mainstream contractor is a business which employs subcontractors for construction work. Those considered mainstream contractors are usually property developers, or builders who build and alter properties to sell on for a profit. Other businesses that come under the umbrella of mainstream contractor include those that spend at least £1 million every 3 years on construction, and foreign businesses who carry out construction work in the UK.
These contractors would be those whose main operations are in another industry, but who still spend a lot of money on construction. Deemed contractors are usually manufacturers, retailers, local authorities and housing associations.
A subcontractor is anyone who completes construction work for a contractor. Even if you work as a contractor who employs subcontractors, you will be considered a subcontractor under CIS rules for any work that you do for another contractor. Subcontractors can include those who are:
- sole traders
- labour agencies
- companies who carry out any construction work for contractors
When does CIS not apply?
There are some jobs within the construction industry which do not require you to register under CIS, including:
- Architects and surveyors
- Carpet fitters
- Anyone who delivers construction materials
- Work on construction sites not related to construction (running the site canteen, for example)
How much is the CIS deduction?
Construction Industry Scheme deduction rates work out to:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% if the subcontractor has ‘gross payment’ status, which means that they don’t have deductions made
How to be CIS compliant
- Register for CIS before you employ your first subcontractor. Make enquiries first to see if you should be employing a person instead of subcontracting them, as if they should be working for you as an employee you risk having to pay a penalty.
- Check that your subcontractors are also registered with CIS. You can make an application to HMRC to find out whether or not a subcontractor has registered with CIS, and you will then need to make deductions from their payments and file monthly returns.
- Keep HMRC up to date with any changes. If there is a change to your business which you do not report to HMRC then you risk punitive measures.
How can a subcontractor apply to receive gross payments?
For subcontractors who want to receive gross payments (which is the total amount they have earned before tax deductions), you may be able to do this under some circumstances. To apply to receive gross payments you need to provide evidence to HMRC that you pass the following tests:
All of the construction work that you have completed must have been carried out in the UK and your companies financial dealings must be predominantly carried out through a bank account.
You must have earned a minimum amount annually to be eligible for gross salary. These limits are:
For an individual – your annual turnover must be at least £30,000, from construction work alone.
For a partnership – turnover must exceed either £200,000 or the multiple turnover threshold excluding the cost of materials. The multiple turnover threshold is the sum of each individual in the partnership multiplied by £30,000, plus the amount of the threshold each company in the partnership would obtain if that company were applying on their own.
For a company – annual turnover must exceed the lower of £200,000 or the sum of the number of directors multiplied by £30,000.
Any business applying for gross payments will have to prove that they have complied in full with any tax obligations for the previous 12 months before the date of their application. This will require you to send full accounts as well as any other information.
What’s new with CIS?
HMRC are currently focusing in on compliance in general, both for businesses and individuals, in order to curb tax evasion. The introduction of Making Tax Digital was designed to encourage greater transparency, as well as allowing companies to work out and pay their tax with more ease.
Newest developments in CIS include:
- Non-resident businesses engaging in construction and taxed according to the CIS scheme are now able to register online as a contractor or subcontractor, as of September 2018.
- As of April 2019, the security deposits’ legal regime for PAYE tax now takes into account CIS deductions, allowing HMRC to force businesses to hand over information about any securities, as long as HMRC has reason to believe that the company is high-risk for non-compliance.
- It has also been suggested that from the tax year beginning April 2020, CIS deductions could be considered a secondary preferential creditor if and when a business becomes insolvent.
CIS is one of the more taxing compliance regimes, pardon the pun, and for the uninitiated there is a good chance of not adhering to it fully. Sticking to the rules, and being able to interpret them correctly, comes over times as you operate the scheme in your business
If you are a new construction business, or an existing one, and have questions about complying with CIS and understanding how it applies in your situation then the team at TFMC will be happy to help. Why not contact us on 0800 470 4820 or email [email protected] to find out more.