a guide for small businesses

Andreas Milano

Construction businesses using the Construction Industry Scheme (CIS) need to deduct money from a subcontractor’s payments. These payments go to HMRC as part of the subcontractor’s tax and National Insurance obligations. This guide covers what the CIS means for both contractors and the subcontractors they hire – both could be […]

Construction businesses using the Construction Industry Scheme (CIS) need to deduct money from a subcontractor’s payments. These payments go to HMRC as part of the subcontractor’s tax and National Insurance obligations.

This guide covers what the CIS means for both contractors and the subcontractors they hire – both could be small businesses. Jump to the relevant section for you using the links below.

What is the Construction Industry Scheme (CIS)?

Unlike most self-employed people, those working in the construction industry for a contractor have money deducted from their payments for tax and National Insurance.

Contractors deduct 20 per cent in subcontractor CIS payments if the subcontractor is registered with the CIS. This increases to 30 per cent if the subcontractor isn’t registered.

Gov.uk says that you need to register as a contractor if either:

  • you pay subcontractors for construction work

  • 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 (in this case, you’re known as a ‘deemed contractor’)

You need to register as a subcontractor if:

It’s possible that small businesses will fall under either one – or both – of these categories. If you fall under both, you need to register as both a contractor and a subcontractor.

What construction work is covered by the Construction Industry Scheme?

According to HMRC, all construction work is covered under CIS:

  • site preparation

  • alterations

  • dismantling

  • construction

  • repairs

  • decorating

  • demolition

The scheme covers all business structures too, whether they’re companies, partnerships, or self-employed sole traders.

But some jobs aren’t covered, including:

  • architecture and surveying

  • scaffolding hire (with no labour)

  • carpet fitting

  • delivering materials

  • work on construction sites that’s clearly not construction, like running a canteen or site facilities

Are there other Construction Industry Scheme exemptions?

There are some situations in which CIS doesn’t apply if you’re a contractor. Gov.uk says that it doesn’t apply if your work is:

  • paid for by a charity or trust

  • paid for by a governing body or head teacher of a maintained school on behalf of the local education authority

  • on the subcontractor’s own property and worth less than £1,000, excluding materials (you need to get an exemption by calling the CIS helpline)

The scheme doesn’t apply to deemed contractors paying for:

How do CIS deductions work for contractors?

As a contractor, you need to register for CIS before you take on your first subcontractor.

How to register for CIS as a contractor

To register, you need to set up as a new employer with HMRC, who’ll then contact you with the information you need to register as a CIS contractor.

When you set up as a new employer, HMRC will set up a Contractor Scheme for you (and a PAYE Scheme, if necessary).

Working with new subcontractors

You need to ‘verify’ subcontractors with HMRC, who’ll then tell you whether they’re registered for CIS (and so which rate you need to make CIS deductions at).

If you’ve worked with a subcontractor before but haven’t included them on a CIS return in the last two tax years, you need to verify them again.

You can verify subcontractors using HMRC’s service or commercial CIS software – you’re required to use commercial software if you’re verifying 50 or more subcontractors.

You need details including your Unique Taxpayer Reference (UTR), your HMRC accounts office’s reference number, and your HMRC employer reference.

You also need your subcontractor’s UTR, as well as their National Insurance number, if they’re a sole trader. For limited companies, you need their company name, company UTR and registration number. For partnerships, you need their nominated partner details, trading name, and partnership UTR.

Making CIS deductions when paying subcontractors

When paying your subcontractor, you need to make CIS deductions at the rate HMRC told you when verifying them.

You start with their gross payment (the total of their invoice), then take away the subcontractor’s expenses, including:

  • VAT

  • materials

  • equipment which is now unusable (‘consumable stores’)

  • fuel used, except for travelling

  • equipment hired for this job (‘plant hire’)

  • manufacturing or prefabricating materials

Then you make CIS deductions from that amount (at 20 or 30 per cent – although some subcontractors may have ‘gross’ CIS status, meaning there won’t be any CIS deductions).

After paying subcontractors, you have to give them a payment and deduction statement within 14 days of the end of each tax month.

You need to pay the CIS deductions to HMRC by the 22nd of each month through the CIS scheme they set up for you when registering, otherwise you could be charged interest and penalties.

It’s important to keep accurate records of the gross amount invoiced by subcontractors, expenses, and deductions. You have to keep these for three years after the end of the tax year they relate to – if you can’t show your records to HMRC when asked, you might be fined £3,000.

Filing CIS monthly returns as a contractor

You’re required to tell HMRC about the monthly payments you make to subcontractors by sending a monthly return. You have to do yours by the 19th of each month, otherwise you’ll get a £100 penalty (which could increase to £3,000 depending on how late you file).

You file returns by using the CIS online service or commercial CIS software.

If you haven’t made any payments to subcontractors in a particular month, you still have to tell HMRC (you can do this using your online account).

If you’ve stopped using subcontractors temporarily, you can make an inactivity request by contacting HMRC. This lasts six months.

You’ll also have to let HMRC know if:

  • your address changes

  • your business structure changes

  • a contractor dies

  • you take on another contractor’s business (as a multiple contractor)

  • you’ve stopped trading or using subcontractors

How do CIS deductions work for subcontractors?

While it’s not strictly mandatory to register for CIS as a subcontractor, keep in mind that registered subcontractors will have CIS deductions made at 20 rather than 30 per cent.

You may also be able to apply for ‘gross’ payment status, meaning your contractor won’t make CIS deductions at all. You might qualify if:

  • you usually meet your tax obligations on time

  • your business does construction work (or provides labour for it) in the UK

  • you run your business through a bank account

You also have to meet a minimum turnover amount. HMRC will review gross payment status each year, so it’s important to keep up with the conditions of the scheme (like meeting tax deadlines).

How to register for CIS as a subcontractor

You need these details:

  • business or trading name

  • National Insurance number

  • Unique Taxpayer Reference (UTR)

The process is different depending on your legal structure:

Getting paid through CIS as a subcontractor

Your contractor needs to verify you first, so make sure you give them the same business name you used when registering, as well as your UTR.

If you’re not registered, or your contractor can’t verify you, CIS payments will be deducted at the higher 30 per cent rate.

Your contractor needs to give you your CIS statements within 14 days of the end of each tax month. These help you work out whether you still owe tax and National Insurance – or whether you’re due a refund.

You can have some expenses on your invoice that the contractor will deduct from your gross payment before CIS deductions:

  • VAT

  • materials that you’ve paid for directly

  • equipment which is now unusable (‘consumable stores’)

  • plant hired for the job

  • manufacturing or prefabricating materials

It’s important to keep accurate records for your tax return.

CIS deductions and paying tax

As your CIS deductions go towards your tax and National Insurance, this affects your overall tax liability.

Sole traders and partners who pay tax through Self Assessment should record the full invoice amounts as income, and then put CIS deductions in the dedicated section.

HMRC will work out your liability – if you still owe tax, you need to pay it by 31 January, but it could also be that HMRC will owe you a refund.

The process is different for limited companies, who can claim back CIS deductions through the monthly payroll scheme.

Let HMRC know about any changes

You have to tell HMRC about certain changes to your business, particularly if your business structure changes. You also need to tell them about changes to your trading name, addresses, and shareholders – and be sure to let them know if you’ve stopped trading.

The Construction Industry Scheme is a complex and detailed topic

Please only use this guide as an overview of the Construction Industry Scheme (CIS). HMRC has a lot more information on the scheme, as well as a dedicated CIS guide on its intricacies. It’s worth looking at this if you’re not sure about anything.

Keep in mind that there were a number of changes introduced to the CIS on 6 April 2021, designed to tackle abuse of the system. An HMRC policy paper describes these changes in detail.

What else would you like to know about the Construction Industry Scheme? Let us know in the comments below.

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