The Construction Industry Scheme (CIS) is a tax system that applies to those involved in construction work. It specifically applies to contractors and subcontractors.
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CIS is a bespoke set of HMRC rules that govern what tax is owed when contractors pay subcontractors for construction work.
Do I need to register for CIS?
Any company that does business in the construction industry, as a contractor paying subcontractors, should be registered for the CIS scheme.
Any subcontractor, working in construction and paid by a contractor, should be registered as CIS for tax purposes. Under CIS, a contractor must deduct 20% from your payments and pass it to HMRC.
What is a contractor?
If, like many in the construction industry, your company contracts construction work out to subcontractors then you are a contractor. A company or business that is a contractor needs to register with HMRC as a contractor.
The following steps should be completed by a contractor:
- Register for CIS with HMRC, by phone or online.
- Verify your subcontractors, to find out how to pay them.
Contractors deduct money from a subcontractor’s payments (20% or 30% depending on whether the subcontractor is registered for CIS) and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
What is a subcontractor?
A subcontractor is a person who is self-employed or has a limited company that works in the following ways:
- Operates in the construction industry
- Has a contract with a contractor
- Is paid by the contractor for the work done
If any of the above applies to you, it is likely your work, and tax will be covered by CIS.
As a subcontractor, if you are a limited company and CIS registered, your contractor will deduct 20% from your gross income which must be claimed back through your company’s monthly payroll scheme. If you are sole-trader and CIS registered, you would have to complete a self-assessment to receive a CIS refund.
CIS tax deduction rates
If you are not registered for CIS, the contractor will make a 30% tax deduction from your pay. Once registered HMRC will contact you to confirm the registration and provide you with all the information you require.
HMRC will determine at this point whether you can be paid gross or with tax deducted at a 20% rate.
The criteria to determine the payment status is decided from three tests.
The Business Test: Your business must carry out construction work or provide labour for construction work in the UK and the business must be run largely through a bank account.
The Compliance Test: The business, and any directors in the company, must have submitted all appropriate tax returns and paid all taxes due on time in the last 12 months before the application for gross payment to apply.
The Turnover Test: HMRC will review the business turnover from construction work for the preceding 12 months ignoring VAT & the cost of any materials. The turnover must be at least £30,000.00 for each director of the company. From April 2016, where a company has multiple directors or partners, the limit for determining gross payment status will be reduced from £200,000 to £100,000.
For more details on the CIS scheme get in touch with one of our expert CIS accountants.