If you're UK-based and have any dealings with HMRC, you've probably heard about the Construction Industry Scheme. Perhaps you've always wondered what it's all about. Well, wonder no more. Here's our brief Construction Industry Scheme guide.
In short, the Construction Industry Scheme (CIS) allows a deduction of taxes at the source from payments in the construction sector. The purpose of the scheme is for HMRC to raise more revenue.
The CIS has nothing to do with payments to staff. They're covered by the Pay As You Earn (PAYE) scheme, with tax deducted at the source.
CIS is all about payments made by contractors to subcontractors.
Contractors are businesses that enter into contracts with clients. Subcontractors handle specific elements of the work while being paid by the contractor.
Subcontractors must pass three tests to get payments:
If you failed any of these tests, you might still be able to register with HMRC to pay tax at the lower rate (20 percent).
If you're a subcontractor who subcontracts the work with the original contractor to another firm, you'll become a contractor yourself. You then have to apply CIS when you pay the new subcontractor. That means you'll be both contractor and subcontractor.
You should register for the scheme if you:
So how does HMRC define construction work? The CIS covers the majority of construction activity. This includes permanent or temporary structures, roads, bridges and general civil engineering. The work should comprise:
Here are some examples.
Let's say you're a bathroom fitter. You're doing an entire refit and redesign of the main bathroom. You're installing new units and tiles. You also have to replumb the sink and bath.
As part of the work, the client also wants a new boiler fitted. This job comes under the definition of construction operations, along with the building work you're carrying out.
You decide to do everything by the book. You engage a gas engineer who's on the Gas Safe register. This engineer is your subcontractor, so he or she must register as a contractor under CIS.
Want to get around this? Simply recommend a fitter to the client. After they've carried out the work, they directly invoice the householder. You won't be engaging a subcontractor, so there's no need to involve CIS.
Now let's imagine you're a handyman working for homeowners directly. When you have more work than you can handle, you'll sometimes take on a helper. You get paid by the client, and you pay your helper.
It's worth checking out the employment status of your assistant. They might not be able to satisfy self-employment tests. Which means you might not need to register yourself as a contractor.
Employment status must be taken into account before you apply the CIS. However, when you're a self-employed contractor taking on ad hoc help, it will probably be overlooked.
One slight grey area concerns landlords and whether they qualify as contractors. In general, HMRC doesn't define landlords as mainstream contractors, although there's technically a case for this.
So, if you're a landlord, you won't need to register for CIS until you spend over an average of £1 million a year over a three-year period on building work.
Meanwhile, here are some sectors that don't have to register for CIS:
If you qualify, registering for the Construction Industry Scheme is pretty straightforward.
If self-employed and unregistered, you should do so within three months of becoming self-employed. You can call the Newly Self-employed Helpline on 0300 200 3504.
If you've already done this but also need to register under the CIS scheme, you can call the CIS Helpline on 0300 200 3210.
Here's what you'll need to tell them:
If you're both a contractor and a subcontractor, you must register for CIS as both.
While you're there, you can apply for gross payment status. This means that, if you're a subcontractor, contractors will pay up in full, with no deductions. You then pay your dues at the end of the tax year.
Once you've registered for CIS, you can call the CIS helpline to apply for gross payment status or go online.
If you haven't got a UTR, register for self-assessment as newly self-employed, then select 'working as a subcontractor'. You'll automatically be registered for both self-assessment and CIS. Alternatively, you can register by calling the CIS helpline.
HMRC keeps your partnership and sole-trader registrations separate. You'll have to provide your trading name and partnership UTR.
If you're a subcontractor based overseas but do construction work in the UK, you must still register for CIS.
If you're having trouble registering, you can call the CIS helpline on 0300 200 3210.
HMRC also allows you to sign up for webinars and emails and watch videos that explain CIS in more detail.
If you're a contractor registered for CIS, you must deduct tax at the source for all payments you make to subcontractors. At what rate is tax deducted? That all comes down to the subcontractor's registration status. There are three possibilities:
The contractor deducts tax at 30 percent from payments to the subcontractor. This deduction excludes VAT charged by the subcontractor and the cost of materials.
The contractor deducts tax at 20 percent excluding VAT and materials. If the subcontractor isn't entitled to gross payments, it's still better to register so that they get the 20 percent tax deduction.
The contractor won't deduct anything from the payments. The subcontractor deals with any tax due on his or her annual tax return. This scenario usually works best for subcontractors.
Subcontractors tied into partnerships or sole traders can treat any tax deducted as income tax on profits. Where subcontractors are a limited company, deducted tax can be treated as employers' obligations to HMRC, such as PAYE or National Insurance Contributions (NICs).
Under the Construction Industry Scheme (CIS), subcontractors have their money deducted by contractors, who declare it to HMRC. These are advance payments towards the subcontractor's tax and National Insurance.
Contractors have to register for CIS. Subcontractors aren't obliged to register but, if they don't, their deductions will be at a higher rate.
If you're still confused, there's further enlightenment available through HMRC's guide for contractors and subcontractors.