What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme defines the rules by which payments to subcontractors must be made by contractors. It also allows for subcontractors to be paid their gross amount so they themselves can organise their income tax contributions.
Under the Scheme, all payments made from contractors to subcontractors are determined by the subcontractor’s tax status. Depending on whether the subcontractor is an employee or self employed, this may require the contractor to make a deduction, which they then pay to us, or the sub contractor can apply to be paid a gross amount.
Recent changes to the CIS
The new CIS began on 6 April 2007. It aims to:
- reduce the regulatory burden of the Scheme on construction businesses
- improve the level of compliance by construction businesses with their tax obligations
- help construction businesses to get the correct employment status of their workers.
Here’s how it works:
- there are no CIS cards, certificates or vouchers.
- contractors must 'verify' new subcontractors by contacting HMRC.
- subcontractors are still paid either net or gross, depending on their own circumstances
- HMRC decides and tells the contractor whether to pay net or gross.
- there is a higher rate tax deduction if a subcontractor cannot be 'matched' on the HMRC system. This of course encourages the subcontractor to register. This increased rate will apply until the subcontractor contacts HMRC and registers.
- there are no CIS annual returns, only monthly returns
- contractors must declare on their return that none of the workers listed on the return are employees – i.e. that instead, they are self employed. This is called a status declaration.
- nil returns must be made when there are no payments in any month. These can be made over the telephone as well as over the Internet or on paper. There will be financial penalties for failure to submit a return (including nil returns).
How much must I pay?
Contractors are required to deduct 20% of the gross payments to registered contractors and 30% from the pay of unregistered contractors.
Is my business covered by the Scheme?
Most probably, yes. The Scheme covers all types of businesses including:
- companies;
- partnerships;
- self-employed individuals (contractors or sub-contractors).
The Scheme has redefined the terms 'contractor' and 'subcontractor' - they now have broad, special meanings.
Contractor: a contractor is a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be Government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.
Non-construction businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of three years is £1 million or more.
Anything other than the above, for example, non-construction businesses or other businesses that spend less than an average of £1 million a year on construction work, and private householders, are not counted as contractors thus are not covered by the scheme..
Subcontractor: a subcontractor is a business that carries out construction work for a contractor.
What if I am both?
Many businesses pay other businesses for construction work, but are themselves paid by other businesses too. If this is you, you should follow the rules for contractors in this situation, and when you are working as a subcontractor, you should follow the rules for subcontractors.
How the Scheme operates
Registering for the Scheme
All contractors must register with the HMRC for the Construction Industry Scheme. Similarly, sub contractors should register - if you do not, you will be charged a higher rate of 30% from your income. The other benefit is that the HMRC provide essential registration details that contractors and subcontractors will need to use when they deal with payments.
Registering for the Scheme – subcontractors
If you are a newly self-employed subcontractor since 5 April 2007 or you last had a temporary registration card CIS4(T) that expired on or before 31 March 2007 and was not renewed, you should register for new CIS. This way, you avoid the higher deduction on payments received.
When should I register?
The sooner the better. The best time is when you, your firm, or your company is about to start work within the construction industry.
How to register
To register, or request more information, please contact HMRC.
Tel: CIS Helpline on 0845 366 7899
Online: http://www.hmrc.gov.uk/new-cis
HMRC then write and confirm your registration as well as other details.
Verifying subcontractors
Before a contractor can make a payment to a subcontractor for construction work, they should verify with HMRC that the subcontractor is registered. HMRC will then tell you the specific rate of deduction to use, or whether the payment can be made without any deductions.
Making deductions
If advised to make a deduction, part of that should be paid to HMRC, the other part (representing the cost of materials incurred by the sub contractor) is for you.
If no deduction is required, the contractor can make the payment to the subcontractor in full.
If a deduction is required, the contractor must:
- calculate the deduction
- make the deduction
- record details of the payment, materials and deduction
- make the net payment to the subcontractor
- complete and give the appropriate statement of deduction to the subcontractor.
Returns and checks
Each month, contractors must send HMRC a complete return of all the payments they have made within the Scheme or report that they have made no payments. The return must include:
- details of the subcontractors
- details of the payments made, and any deductions withheld
- a declaration that the employment status of all subcontractors has been considered
- a declaration that all subcontractors that need to be verified have been verified.
Contractors must send the monthly return to reach HMRC by the 19th of each month. Beware - contractors who miss this deadline will be charged an automatic penalty of at least £100.
Net Lawman advice:
If you are a contractor: ensure you are registered on the scheme. HMRC will then tell you how to pay your sub contractors correctly.
If you are a subcontractor (self employed): we advise you register with the scheme by contacting HMRC. It is not mandatory but it will save you money.
Relevant Net Lawman document templates:
Construction Industry Contracts: employees
Construction Industry Contracts: self employed
All the employment contracts for self employed construction workers (sub contractors) take account of CIS.
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