Construction Industry Scheme (CIS)
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC). It’s crucial that you know whether you’re considered a contractor or a subcontractor under the rules, so that you pay the right amount of tax. Contractors must register for the scheme. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
What is the difference between a contractor and a subcontractor?
Those who pay subcontractors for building work or who spent more than £3 million on construction in the year are considered contractors.
Subcontractors are exempt from CIS registration; nonetheless, contractors are then required to withhold 30% of payments made to unregistered subcontractors. As an alternative, you can register as a CIS subcontractor, where a 20% deduction is then made.
Most of the time, when subcontractors file their tax returns to HMRC at the conclusion of the tax year, they will receive a tax rebate. So our advice is to complete the return as soon as possible.
What work is covered by CIS?
The majority of businesses that engage in construction and building work will need to register with CIS since the definition of construction activity under UK law is so broad.
But in general, the following will fall under CIS work:
• building work, including temporary structures
• demolition and dismantling
• alterations, repairs and decorating
• electrical work and plumbing
• Scaffolding and assembling of housing structures
Exempt from CIS:
If the work being carried out is clearly not construction, then you don’t need to register for CIS. An example of this will be pest control at the building site or the provision of a canteen for the workers.
Some other exceptions to the rules are:
• surveying
• carpet fitting
• architecture
What do I need to do if I’m a subcontractor?
In the ideal scenario, you should register for CIS as soon as you can if you meet the requirements for a subcontractor employed in the construction sector. Registering means that contractors will make deductions at a lower 20% rate.
Gather your CIS payslips, work-related expenditures and any other paperwork linked to your job so that you may prepare your end-of-year self-assessment. If your contractor provides you a CIS payslip, the March payslip should have all the year-to-date figures that you will need for your tax return.
What do I need to do as a contractor?
A monthly CIS return that lists all subcontractors to whom payments have been made must be submitted by the contractor to HMRC. The sums paid, the amount spent on materials, and deductions are all included in the return. The return is due for submission within 14 days of the month’s end and a NIL return will also need to be submitted if there were no payments made during the month. There are late filing penalties levied by HMRC for late submissions or payments.
In order to determine whether a subcontractor should be paid gross or net, a contractor who hires a subcontractor who hasn’t worked for them in the past must obtain their name, Unique Tax Reference Number (UTR) and national insurance number and contact HMRC. This process is known as verification and a reference number will be given by HMRC for each subcontractor that matches their record.
What are common pitfalls/mistakes with CIS?
The most common mistake is not realising that the work you do requires you to register for CIS. Eventually, HMRC will be on your case and there could be potential penalties for not registering.
Another common mistake is not applying the correct CIS tax deduction rate. You should draw up procedures for your company for verification of all subcontractors that you work with. We have drafted a handy guidebook with a checklist for contractors, contract us for a free copy.
With recent legislation changes, incorrectly calculating or failing to calculate the VAT domestic reverse charge for building services has become one of the most common mistakes made by contractors. Because of the domestic reverse charge, the contractor, rather than the subcontractor, is required to account for the VAT payable on goods received for building works.
How to register for CIS?
The easiest way to register is by doing it online, you can do this by following the below link:
How can Finanche help you?
For contractors, we can assist you in registering for CIS as a contractor and we can do the monthly CIS returns on your behalf.
For subcontractors, we can prepare your self-assessment tax returns. We will also chase up HMRC on your behalf so you receive the tax rebate on a timely manner.