The Construction Industry Scheme (CIS) defines the tax rules relating to payments to self-employed subcontractors. It sets out which types of deductions are to be made from payments to unregistered and registered sub-contractors, and how some of them should receive payment gross and account to HMR&C for tax due themselves.
This article does not refer to any person who works under a contract of employment. In that case, tax is deducted under the usual PAYE rules, as for any other employee.
Recent changes to the CIS
The Construction Industry Scheme has been operational for 50 years. With effect from 6 April 2007, the rules changed with the aim of:
reducing the regulatory burden of the Scheme on construction businesses
improving the level of compliance by construction businesses with their tax obligations
helping construction businesses to assess the correct employment status of their workers
The Scheme covers all types of businesses including companies, partnerships and self-employed individuals (contractors or sub-contractors).
There are no longer annual returns, only monthly returns.
The changes to the Scheme have redefined the terms 'contractor' and 'subcontractor'. They now have broad, special meanings.
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.
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.
Contractors now have no CIS cards, certificates or vouchers.
A subcontractor is a business that carries out construction work for a contractor.
Subcontractors are still paid either net or gross, depending on their own circumstances.
Contractors are required to deduct 20% of the gross payments to registered subcontractors and 30% from the pay of unregistered subcontractors.
What if I am both a contractor and a subcontractor?
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 when you are paying others and the rules for subcontractors when you are working as a subcontractor.
Registering for the Scheme
Every business and self employed individual in the construction industry must register with HMR&C for the scheme. Registered contractors have access to essential registration details that they will need when dealing with payments to sub-contractors.
It is best to register as soon as your firm or your company is about to start work within the construction industry.
Before a contractor may make a payment to a subcontractor for construction work, he must verify with HMRC that the subcontractor is registered. HMRC will then provide the specific rate of deduction to use, or whether the payment can be made without any deductions.
When you make a deduction, the tax element must be paid to HMRC.The remainder (representing the cost of materials incurred by the subcontractor) is for you to keep.
If no deduction is required, you can make the payment to the subcontractor in full.
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.
Contractors are required to keep records of
calculation of the deduction
details of the payment, materials and deduction
the net payment to the subcontractor
the appropriate statement of deduction given 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 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.
Contractors must send the monthly return to reach HMRC by the 19th day of each month. Beware - if this deadline is missed, an automatic penalty of at least £100 will be payable.
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.
Our advice - register under the scheme
Our advice is that if you are a contractor, you should ensure that you are registered on the scheme. HMRC will then tell you how to pay your sub contractors correctly.
If you are a self-employed subcontractor then we advise you to register under the scheme by contacting HMRC. It is not mandatory but it will save you money.