The Construction Industry Scheme (CIS) is a Government initiative that allows contractors in the construction industry to deduct money from a subcontractor’s payments and pass it on to HM Revenue & Customs (HMRC).
These deductions count as advance payments towards a subcontractor’s tax and National Insurance Contributions (NICs), and ensure that businesses comply with tax regulations, avoiding any potential tax evasion.
The CIS applies to businesses undertaking certain aspects of construction work, including:
- Laying the foundations and providing access works on site
- Demolition and dismantling
- Any building work
- Alterations, repairs and decorating
- Installing systems for heating, lighting, power, water, and ventilation
- Cleaning the inside of buildings after construction work
Businesses do not have to apply for CIS for certain jobs such as:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in construction such as machinery
- Delivering materials
- Work on construction sites that is clearly not construction such as site facilities
A contractor is defined by HMRC as anyone who pays a subcontractor for construction work or does not do construction work but has spent more than £3 million on construction in the 12 months since the first payment was made.
Similarly, a subcontractor is defined as anyone who does construction work for a contractor.
Under CIS, constructors are obligated to deduct taxes from the payments made to subcontractors and submit the amounts to HMRC on their behalf. This is typically a 20 per cent tax for subcontractors registered for CIS and 30 per cent for those not registered.
Contractors must also confirm whether subcontractors should be treated as self-employed or employed for tax purposes.
Employed sub-contractors can have their CIS deductions offset against their company’s Corporation Tax or refunded back to the subcontractor by HMRC at the end of the tax year.
For self-employed sub-contractors, CIS deductions are offset against their Personal Tax liability and will be picked up in their annual Self Assessment.
Businesses that want to set up an online payment plan for PAYE contributions need to submit CIS returns that are due.
To ensure sub-contractors comply with CIS regulations, they must ensure they are registered with HMRC and provide contractors with their unique taxpayer reference (UTR) and National Insurance (NI) number.
Subcontractors are also responsible for filing their tax returns with HMRC and paying any outstanding taxes after the appropriate tax deductions have been made by the contractors.
Failure to comply with CIS regulations can lead to hefty penalties and legal issues for both contractors and subcontractors, so it is important that both parties are aware of what is required of them.
The CIS is beneficial to contractors and subcontractors in the construction industry as it simplifies the process of tax deductions by ensuring that contractors deduct the appropriate amount of taxes at source.
It also demonstrates the commitment to compliance with tax obligations and minimises the risks of penalties and audits.
Partaking in the CIS can also provide subcontractors with certain state benefits such as statutory maternity pay, contributory employment and support allowance.
If you would like to know more about the CIS and how to remain compliant, please contact our expert team today.