Construction Industry Scheme (CIS) Guide for Contractors

The construction industry is a major contributor to the United Kingdom’s economy, accounting for over 6% of the country’s GDP. With such a significant impact, it is crucial to understand the regulations and schemes that apply to this sector. One such scheme is the Construction Industry Scheme (CIS), which affects contractors, subcontractors, and other self-employed workers in the industry.

In this blog, we will provide a comprehensive guide to the CIS for contractors, covering everything from its purpose and eligibility requirements to registration and tax obligations.

What is the CIS?

The Construction Industry Scheme (CIS) is a government initiative that aims to regulate and monitor the payment of taxes within the construction industry. It was introduced in 1972 and has since undergone several amendments and updates to serve better the needs of contractors, subcontractors, and self-employed workers.

According to the HMRC, the CIS applies to all construction work carried out in the United Kingdom, including building and renovation projects, repairs and maintenance, decorating and landscaping, and installation of heating, lighting, and security systems. It also includes certain types of businesses related to construction, such as surveying and architectural services.

How does the CIS work?

Under the CIS, contractors must register with HMRC and deduct taxes from payments made to subcontractors, who are then responsible for paying their taxes to HMRC. The rates of deductions vary based on the subcontractor’s registration status and documentation provided by them.

Contractors are also required to submit monthly CIS returns to HMRC, reporting the payments made to subcontractors and the taxes deducted. These returns must be submitted within 14 days of the end of each tax month.

Basically, the CIS acts as a way for contractors to collect and pay taxes on behalf of their subcontractors, simplifying the process for all parties involved.

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Types of Work that are Covered by the Scheme

In the United Kingdom, the CIS covers a wide range of construction work, with the exception of certain types of jobs, such as those related to land and property development. Some examples of construction work covered by the CIS include:

  • Site preparation
  • Alterations
  • Dismantling
  • Construction
  • Repairs
  • Decorating
  • Demolition
The scheme also applies to businesses or individuals providing services relating to construction, such as surveying and architectural work.

Types of businesses that are covered by the scheme

Those businesses that work in the construction industry and make payments to subcontractors for construction work must register with HMRC for the CIS. Such businesses include:
  • Companies
  • Partnerships
  • Self-Employed Individuals
  • Government Departments
  • Local Authorities
  • Contractors
  • Subcontractors
  • Property Developers
  • Housing Associations
According to the HMRC, any business that spends over £1 million on construction work within a three-year period must register for the CIS.

How to register for the CIS?

As a contractor, you must register for the CIS before making your first payment to a subcontractor. To do so, you will need to complete an online registration form on HMRC’s website and provide details such as your business name, trading address, and National Insurance number. Once registered, you will receive a unique tax reference (UTR) number and verification codes by post within 10 working days.

First-time subcontractors must also register for the CIS and provide their business details and National Insurance number to their contractor. Subcontractors who already have a UTR number will not need to register again but should inform their contractors of their status.

Following is the process to register for the CIS as a subcontractor:

  1. Complete the online registration form on HMRC’s website.
  2. Provide your business details and National Insurance number.
  3. Verify your status by entering the verification codes sent to you by post.
  4. Once verified, you will receive a registration confirmation from HMRC.

How to calculate CIS deductions?

There is information you need to collect for calculating the CIS deductions. These include the subcontractor’s status, their UTR or company registration number, and if they are registered under HMRC’s Construction Industry Scheme. Once you have this information, you can use the CIS deduction calculator on HMRC’s website to calculate the amount of tax you need to deduct from each payment made to a subcontractor.

The rates of CIS deductions depend on the subcontractor’s registration status with HMRC, as follows:

  • Gross payment status: No tax is deducted from payments made to subcontractors registered under this status. However, they must still pay their taxes directly to HMRC.
  • Standard deduction status: Under this status, the standard rate of CIS tax deduction is 20%. This applies to subcontractors who are not registered under HMRC’s Construction Industry Scheme and have no verification number.
  • Higher deduction status: Subcontractors registered under the Construction Industry Scheme will have a higher rate of 30% deducted from their payments. This applies to those who do not provide their UTR or company registration number or have been penalized for non-compliance with HMRC’s regulations.

To calculate the CIS tax for the subcontractor, you must deduct the relevant percentage from their payment and pay it to HMRC. The value-added tax (VAT) charged by subcontractors is not included in the calculation of CIS deductions.

For example, if a subcontractor charges £1000 for their services and is registered under the standard deduction status, the contractor must deduct 20% (£200) as CIS tax and pay £800 to the subcontractor.

How to File CIS Returns?

Contractors must submit monthly CIS returns to HMRC, reporting the payments made to subcontractors and the taxes deducted. These returns must be submitted within 14 days of the end of each tax month. To file CIS returns, contractors can use HMRC’s online service or third-party software.

To file CIS returns online, contractors must first register for HMRC’s Construction Industry Scheme Online service. Once registered, they can log in and submit their monthly return by following these steps:

  1. Select the option to “File your CIS return.”
  2. Enter the subcontractor’s details, such as their name, UTR or company registration number, and payment amount.
  3. Submit the return to HMRC.
For those using third-party software, they must ensure that it is compatible with HMRC’s system and includes all the required information for accurate reporting.

How to Pay Subcontractors Under the CIS?

As a contractor, you must pay subcontractors accurately and on time, in accordance with the CIS regulations. You should also provide them with a payment statement that details the amount paid and any deductions made for tax purposes.

First and foremost, it is essential to make sure that the subcontractor is registered under the Construction Industry Scheme and has a valid UTR or company registration number. You should also check their tax status regularly, as this can change, affecting the number of CIS deductions you need to make.

Second, make sure to keep accurate records of all payments made and taxes deducted for each subcontractor. These records must be kept for at least three years, as HMRC may request them for inspection or audit purposes.

Finally, ensure that payments are made on time, preferably on the same day as the payment is received from your client. Failure to do so can result in penalties and lead to complications with HMRC.

How to Pay CIS Deductions to HMRC?

After deducting the appropriate amount of CIS tax from subcontractors’ payments, contractors must pay these deductions to HMRC by the 19th of each month. To do so, they can use one of the following methods:

Online: Contractors can pay CIS deductions via HMRC’s online service or internet banking. To use the online service, they must register for the Construction Industry Scheme Online service and log in to make payments. Alternatively, they can also make payments via internet banking by using HMRC’s bank details.

Bank transfer: Contractors can pay their CIS deductions through a bank transfer using HMRC’s bank details.

Debit or credit card: HMRC also accepts payments made by debit or credit card.

It is important to note that contractors must make payments by the 19th of each month, even if they have not received payment from their clients yet. Additionally, any penalties for late payment will be applied after the 19th of each month, and interest will accrue on any outstanding amount owed to HMRC.

Common CIS Mistakes to Avoid

To help contractors avoid making mistakes when dealing with the Construction Industry Scheme, here are some common errors to watch out for:

  1. Not verifying subcontractors’ registration status: Failure to verify a subcontractor’s registration status with HMRC can result in incorrect CIS tax deductions and potential penalties from HMRC.
  2. Incorrectly calculating CIS deductions: Using the wrong deduction rate or not accounting for VAT can lead to inaccurate CIS tax deductions, resulting in potential fines from HMRC.
  3. Missing the deadline for filing CIS returns: Contractors must submit their CIS returns by the 19th of each month, or they may face fines and penalties from HMRC.
  4. Late payment of CIS deductions: As mentioned earlier, payments of CIS deductions must be made by the 19th of each month to avoid penalties and interest charges.

To avoid these and other mistakes, it is essential for contractors to stay informed about the latest CIS regulations and guidelines from HMRC. This includes regularly checking their subcontractors’ registration status, keeping accurate records of payments and deductions, and submitting CIS returns on time.

Closing Thoughts

The Construction Industry Scheme is a vital component of the UK construction sector, helping ensure that subcontractors are correctly paying their taxes and contributing to the country’s economy. As a contractor, it is crucial to understand your responsibilities under the CIS and follow its guidelines to avoid any potential penalties or issues with HMRC.

By verifying subcontractors’ registration status, accurately calculating CIS deductions, filing returns on time, and making timely payments to HMRC, you can help maintain the integrity of the scheme and contribute to a fair and compliant construction industry in the UK.

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