Construction Industry Scheme (CIS) Guide

If you’re self-employed in the construction industry, you may need to register under what’s known as the Construction Industry Scheme (CIS). Equally, if you’re a construction-industry contractor, with sub-contractors working for you on a self-employed basis, you’ll need to be CIS registered.

Below we look at what the CIS is, the CIS registration process for both contractors and subcontractors, and how the tax position works under this scheme.

 

What is the Construction Industry Scheme?

The Construction Industry Scheme, or CIS, is a scheme under which CIS registered contractors deduct money from a subcontractor’s payments and pay this directly to HMRC. It’s a unique way of paying tax and National Insurance Contributions (NICs) for self-employed people who work as subcontractors in the construction industry in the UK, where these deductions then count as advance payments towards their annual bill to HMRC.

Self-employed tradespeople are often taken on, or engaged, by contractors to perform building works. When working in this capacity, these tradespeople are referred to as subcontractors. However, the CIS only applies if an individual works for a contractor on a self-employed basis, and not as an employed worker. This is a scheme specific to the self-employed within the building and construction industry. This is different to sole traders within other industries, who are entitled to receive gross payments, meaning that no tax is deducted at source, but instead they declare all their income, and pay any tax and NICs, by way of self-assessment.

That said, even where a contractor withholds tax on payments made to a subcontractor, and the subcontractor receives documents similar to payslips, this doesn’t then make that individual an employee or employed worker of the contractor. This means that they will not be entitled to any of the employment rights that are associated with being employed, but simply that some or most of their tax liability is taken directly out of their pay in advance.

Registered contractors have an obligation to determine if their workers are employed or self-employed. Where a person works exclusively for one contractor, and so doesn’t have the risks of running a business, then they may need to be treated as employed for both tax and employment rights purposes, rather than as self-employed. For anyone classed as employed, their tax and NICs will need to be deducted at source by the contractor under PAYE.

 

What type of businesses are covered by the CIS scheme?

The CIS scheme covers most building and civil engineering works. Civil engineering work includes things like roads and bridges, whilst construction work is very broadly defined. This relates to work involving either a permanent or temporary building or structure, including:

• preparing the site, for example, laying foundations and providing access works
• demolition and dismantling
• actual building and construction works
• alterations, repairs and/or decorating
• installing systems for heating, lighting, power, water and/or ventilation
• cleaning the inside of buildings following construction work

Even though the CIS covers more than what you may typically think of as building work — such as site clearing, site preparation and post-construction cleaning — there are some exceptions. This means that you will not fall within the scope of the scheme if you only do certain jobs, including:

• architecture and/or surveying
• scaffolding hire, with no labour involved
• carpet fitting
• making materials used in construction, including plant and machinery
• delivering materials
• work on construction sites that’s clearly not, by its nature, a construction operation, for example, running a canteen, or running security, medical or other site facilities

Where the work in question falls within the scope of the CIS, the CIS covers all such work undertaken in the UK, and applies whether you’re based in the UK or abroad. This means that the same CIS rules apply if your business is based outside of the UK, but you undertake work as a contractor or subcontractor within the UK.

 

Do I need to register under the CIS scheme?

There are two components of the CIS scheme: ‘contractor’ and ‘subcontractor’. If you’re a contractor, engaging other self-employed workers doing construction work, then you ‘must’ register under the scheme. If you’re a subcontractor, then you can choose whether or not to become CIS registered. Subcontractors don’t have to register, but deductions will be taken from their payments at a higher rate if they decide against CIS registration.

However, it’s worth noting that if you do decide to register under the scheme as a subcontractor, this is in addition to registration with HMRC as self-employed for self assessment purposes, and not in lieu of registering as self-employed.

 

How to get CIS registered

How you become CIS registered will depend on whether you’re classed as a contractor or subcontractor, although you must register as both if you fall under each of these categories.

 

Contractors

Broadly speaking, there are two main scenarios in which you’ll need to register as a contractor under the CIS, including:

if your business is in construction and you pay subcontractors to do construction work, for example, if you’re a builder or property developer you’ll be classed as a ‘mainstream’ contractor, regardless of whether you’re running your business as a sole trader, in a partnership or as a limited company;

if your business doesn’t do construction work, but you’ve spent more than £3 million on construction in the 12 months since you made your first payment, you’ll be classed as a ‘deemed’ contractor. This scenario often applies to housing associations or local authorities.

There are certain exceptions for mainstream contractors, such as work paid for by a charity or trust, and well as for deemed contractors, such as work on property for their own business use. These exceptions are in addition to the list of jobs that are also exempt from the scheme.

However, where you fall within the scope of the scheme, you’ll need to follow HMRC’s online process for ‘setting up as a new employer’ to become CIS registered. Having registered, you’ll then get a letter from HMRC with the information you need to start working as a contractor under the scheme. If your business is based abroad, but you do construction work in the UK, there’s a different registration process that will need to be followed.

You must register under the CIS before you take on your first subcontractor. You’ll also need to verify your subcontractors with HMRC, who will be able to tell you whether or not a subcontractor is registered and what rate of deduction to use, or if you can pay them without making deductions. When you pay your subcontractor, you’ll need to make the appropriate deductions from their payments, providing HMRC with monthly returns, and the subcontractor with a payment and deduction statement each time they’re paid.

When you register as a contractor, HMRC will set up a CIS payment scheme for you. If you have employees on your books already, HMRC will change your existing PAYE Scheme to a combined PAYE/CIS scheme. You should usually make one payment each month or quarter to cover your PAYE tax, National Insurance and CIS deductions.

 

Subcontractors

You can register as a subcontractor under the CIS scheme if you work on a self-employed basis and do construction work for a contractor. However, there are different CIS registration methods depending on whether or not you’ve already registered as self-employed, and if you’re working for yourself as a sole trader or through a different trading entity, such as the owner of a limited company or a partner in a partnership or trust.

To register under the CIS you’ll need your business or trading name, your National Insurance number, your unique taxpayer reference (UTR) number and, where applicable, your VAT registration number. If you’re a sole trader and already have a UTR, you can register for the CIS online. If you don’t have a UTR, you’ll need to register as a new business for self assessment purposes, selecting ‘working as a subcontractor’ when prompted. You’ll then be registered for self assessment and CIS at the same time.

To register as another type of business, you’ll need to complete an online form for limited companies or partnerships. HMRC will register the partnership separately to your sole trader registration. They will need the partnership UTR and trading name.

If you undertake construction work in the UK as a sole trader or in a partnership, but your business is based abroad, you’ll need to follow the same CIS registration rules as UK-based subcontractors. For those trading as a limited company, there’s a lengthier postal process.

Once you’ve become CIS registered, you’ll still be responsible for paying the correct tax and NICs for your business, even if contractors have made deductions throughout the course of the tax year. Contractors should give you a monthly statement of what they’ve paid to you, and what deductions they’ve made, to help with your accounting. These can then be used to calculate whether you still owe tax and NICs to HMRC, or are due a refund instead.

If you don’t want advance deductions to be made by contractors, you may be able to apply for ‘gross payment status’ when you register under the CIS. This means that the contractor will not make deductions from your payments and, as either a sole trader or partner, you’ll pay all your tax and NICs at the end of the tax year through self assessment. If you have gross payment status as a limited company, you’ll need to declare all your income in your Corporation Tax return. However, if you’re trading as a company and pay CIS deductions, you must claim these back through your company’s monthly payroll scheme.

 

What are the CIS scheme tax rules?

When a contractor pays a subcontractor, they‘ll usually need to make deductions from their payments. HMRC will tell the contractor how much to deduct from a subcontractor’s payments when they verify them. The CIS deduction rates are:

• 20% for CIS registered subcontractors
• 30% for unregistered subcontractors
• 0% where the subcontractor has gross payment status

It’s not compulsory for a subcontractor to register under the CIS scheme but, if unregistered, the higher rate of 30% will be applied by contractors when deducting advance tax and NICs from a subcontractor’s payments. This means that if a subcontractor doesn’t register, they’ll have to pay more money up-front to HMRC from their earnings.

When making a CIS deduction from a subcontractor’s payment, the contractor will need to take the gross figure set out on the invoice, but not including things like materials paid for directly by the subcontractor, plant hire or VAT. The contractor will then need to deduct the correct CIS rate, as provided by HMRC, from the amount left. The net figure will be the amount payable to the subcontractor, whilst the % deduction will be the amount payable to HMRC.

 

CIS FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert professional advice should be sought.