What Is the Construction Industry Scheme (CIS) and Who Needs to Be Registered in the UK?
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.
What is the Construction Industry Scheme?
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:
- Business Test – prove your business is construction work
- Turnover Test – turnover must be over £30,000 for each director, up to or exceeding £100,000
- Compliance Test – tax affairs must be shipshape and payments made on time. You should also be registered with HMRC to receive the 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.
Who needs to register for CIS?
You should register for the scheme if you:
- Work in construction
- Pay subcontractors
- Spend more than £1m over three years
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:
- Dismantling and demolition
- Building works
- Modifications, repairs and decorating
- Installing heating and electrics
Here are some examples.
The bathroom fitter
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:
- Architecture and surveying
- Scaffolding hire (without labour)
- Carpet fitting
- Delivering materials
- Construction site work that’s not building, such as site facilities
How to register for the Construction Industry Scheme
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:
- Your legal business name and a trading name if it’s different
- Your National Insurance Number
- The unique taxpayer reference number (UTR) you got when you registered as self-employed
- Your VAT registration number (if applicable)
If you’re both a contractor and a subcontractor, you must register for CIS as both.
Registering for CIS as a sole trader
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.
What if you don’t have a UTR?
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.
Registering for CIS as Another Type of Business
HMRC keeps your partnership and sole-trader registrations separate. You’ll have to provide your trading name and partnership UTR.
Registering for CIS When Based Overseas
If you’re a subcontractor based overseas but do construction work in the UK, you must still register for CIS.
Get HMRC’s help
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.
What are the Rates of Taxation Under CIS?
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 subcontractor does not register
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 subcontractor has registered but doesn’t qualify for gross payments
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 subcontractor registers to receive gross payments
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).
What obligations does a subcontractor have?
- Keeping records good enough to complete tax returns and list the cost of materials.
- Notifying HMRC of changes in the business, such as changes of address or business structure.
- Verifying their registration status with the contractor.
- Not making false statements during registration, which could attract penalties of up to £3,000 plus up to £300 and daily penalties for not producing records.
- Complying with the three tests of eligibility.
What obligations does the contractor have?
- To register as a contractor with HMRC, a service available online.
- CIS applies only to the self-employed, so contractors must be sure that subcontractors aren’t their employees. This can be tricky. Check HMRC’s employment-status indicator.
- To check the recipient’s status. This can be done only once a contract is in place, or a tender has been accepted. Verification is through HMRC’s online CIS service.
- To provide a written statement to subcontractors of deductions. Even if they’ve registered for gross payment, this is good practice.
- To keep records of gross payments, cost of materials, tax deducted and any verification number.
- To make monthly records of payments to HMRC. It’s possible to stop receiving returns for up to six months if no contracts will be in place.
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.