Any contractor or sub-contractor working in the construction industry needs to understand the Construction Industry Scheme (CIS) in relation to their tax affairs. The CIS is a set of rules set out by Her Majesty’s Customs and Revenue (HMRC) – often referred to as the tax authorities – that detail how payments to sub-contractors for construction work must be handled.
The CIS can cover all the types of businesses working in the construction industry, so it applies to partnerships and companies, self-employed people who work as sole traders, and limited liability partnerships. The scheme doesn’t just include the likes of builders but may also apply to property developers, gang masters, labour agencies or staff bureaux.
Some organisations that do not do actual building work may also be covered by the CIS if their spend on construction operations is more than £1 million per year averaged out over three years. These could include housing associations, certain large businesses, local authorities and government departments.
How CIS works
Those working in the construction sector need to register on the CIS through HMRCs web portal. It’s a way the government ensures that tax is paid fairly and to minimize tax evasion. Contractors will subtract the required amount of tax from sub-contractors when paying them and need to submit monthly returns, with heavy penalties for non-compliance.
A contractor has to verify the sub-contractor to find out which CIS taxation rate applies to them, with three different rates depending on the sub-contractor’s registration status.
the lowest rate is 0% and only applies to subcontractors who have registered to receive gross payments. If that has been permitted, the contractor pays the full amount of the charges and the sub-contractor accounts for this on its annual tax return.
sub-contractors who are registered on the scheme but are deemed ineligible to receive gross payments will have 20% tax deducted from payments, though this excludes the cost of materials and any VAT that may be charged by the supplier of labour.
a sub-contractor who does not register on the scheme will have 30% tax deducted by the contractor, again excluding material costs and VAT, so even if a sub-contractor is not eligible for gross payments it makes sense to register to avoid having to pay an extra 10% tax.
HMRC has been keen to increase its tax revenues to stop individuals and businesses avoiding or evading tax. Avoidance, which is legal, is using accepted methods to reduce a tax bill, whereas evasion, not intending to pay, is illegal. It’s therefore important to be compliant with CIS to avoid the possibility of a tax investigation.
Getting help with CIS
Handling all the administration required to apply CIS rules can be onerous for self-employed sub-contractors, but there are a number of companies that are set up to help. Sub-contractors who are CIS registered can take advantage of CIS payroll schemes these companies offer whereby invoices and payments, together with CIS are taken care off. This frees up more time to look for and undertake construction work.