What Is the Construction Industry Scheme (CIS), and How Does It Work?

 

You may have heard about the CIS if you work in the construction sector. The Construction Industry Scheme (CIS) is a plan in place to ensure the compliance of construction workers with tax laws. It was set up by the HMRC, and its activities include ensuring contractors deduct a certain amount from their subcontractors’ payments periodically. These deductions cover the lump sum of money the subcontractors should have paid as their yearly National Insurance Obligations and income tax to the HMRC. 

Who Should Register for CIS?

The CIS is for contractors and subcontractors in the construction industry. However, certain conditions determine who falls under these categories, and they include:

  • Contractors: The CIS mandates that you register as a contractor if subcontractors work for you or you spent over £3 million on construction projects in the last 12 months.

     

  • Subcontractors: The CIS considers you a subcontractor if you do construction work for a contractor. However, if you’re a subcontractor but your annual turnover passes a certain threshold set by HMRC, and your tax compliance record is good, you’re eligible to apply for the gross payment option. This means your employers have to pay in full, but you’ll handle the payment of your taxes at the end of the year.

     

Some small businesses may fall under both of these categories. They must register under both categories and follow the rules for either type while working in that capacity.

What Type of Work Is Covered Under CIS?

All construction work that is carried out in the UK falls under the CIS, including jobs like:

  • Construction
  • Site preparation
  • Installing power systems
  • Repairs
  • Alterations
  • Dismantling
  • Demolition
  • Decorating

     

While this scheme does not cover construction operations outside of the work, the rules vary for a business based outside the UK but carries out construction work in the UK. This falls under the scheme, and such business must be registered accordingly. The scheme also covers all business structures, including self-employed sole traders, partnerships and companies.

How Can I Register?

To complete your CIS registration, you’ll need some relevant documents and information and follow the process prescribed by the HMRC. The requirements for contractors and subcontractors vary slightly, and they include:

Contractors

Contractors need to complete their registration with HMRC before they can start paying subcontractors. 

Register with your Government Gateway User ID, password, National Insurance Number, business name, and Unique Taxpayer Reference (UTR). 

Once you complete your registration, you can take on subcontractors after verifying that they’re registered under the CIS. Then, you can start making the necessary deductions, making your CIS payments, and filing the monthly CIS tax returns.

Subcontractors

The registration process differs based on your company structure.

For sole traders, you need your Unique Taxpayer Reference (UTR). Without UTR, you can still register for self-assessment and CIS simultaneously by clicking on the ‘working as a subcontractor’ option during your registration. Other requirements include a Government Gateway user ID and password.

For limited companies and partnerships, HRMC provides online forms to register separately. Your partnership UTR and trading name are requirements for partnership registration.

You can find all the relevant information on registration and the Construction Industry Scheme (CIS) in the guide for contractors and subcontractors.

How Much Is the Tax Deduction?

The rates depend on whether you’re registered under the CIS. For registered subcontractors, the deduction rate is 20%, while for unregistered subcontractors, the deduction is 30%.

Are There People Exempted From Registering for CIS?

Some jobs do not come under the purview of the CIS, and they include:

  • Architecture and surveying
  • Carpet fitting
  • Producing materials that are used in the construction industry
  • Scaffolding hire (This only applies if there’s no labour.)
  • Delivering materials
  • Site activities on construction sites that are not construction operations, such as running a canteen.

For contractors, there are also certain situations where CIS will not apply. They include construction operations:

  • paid for by a charity or trust
  • paid for by management of local education authority maintained schools
  • on the land or property owned by 
  • a subcontractor amounting to less than £1,000, without the cost of materials

It also exempts deemed contractors in these situations:

  • construction operations on property for their own business and not for other commercial purposes.
  • a construction contract that does not exceed £1,000. This total should not include the cost of materials.

However, some of these exemptions have limitations, so you should seek professional advice if you think you may be eligible for an exemption. You may need to contact the CIS helpline to get some of these exemptions.

Benefits of CIS

Registering for the CIS scheme can be beneficial for both contractors and subcontractors. Some of these benefits include:

  • Registered subcontractors save an extra 10% that would otherwise be deducted if they weren’t registered under the scheme.
  • Subcontractors can avoid the burden of paying a lump sum in tax at the end of the year since the monthly deductions help spread the cost across the year.
  • It ensures that individuals in construction comply with tax rules and helps them avoid severe penalties.
  • It protects subcontractors from false employment and ensures they receive the correct employment rights.
  • You can choose not to worry about all the stress of accounting and calculations and instead have accountants and experts in CIS handle the figures.

Conclusion

The CIS is a complex tax system crucial for construction businesses to understand and comply with. It involves registering with HMRC, verifying subcontractors, and making correct deductions for tax purposes. Managing CIS can be challenging and time-consuming, so it is beneficial to seek the expertise of seasoned tax professionals like Taxace. You can trust Taxace to navigate the intricacies of CIS so you can focus on your construction business with peace of mind. Additionally, if you have overpaid tax, we can assist you in obtaining your refund hassle-free.

Contabila UK - Founder and CEO -TaxAce - Iurie Bivol

Iurie Bivol

Director TAXACE LTD

Entrepreneur and accountant with 15 years of experience in the UK.

Contabilitate UK - Senior Tax Assistant - Alina Costreie

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