New workers and employers in the construction industry often find themselves asking what is the CIS scheme? Put simply, if you are self-employed in the construction or building industry, you need to pay tax according to the construction industry scheme (CIS).
The UK construction industry employs 1.3 million workers, around half of whom are self-employed and subject to CIS. In this blog, we’ll look at CIS, what it is, and when you need to register.
What is the construction industry scheme exactly?
The CIS is an HMRC scheme. It applies to self-employed (the CIS scheme also applies to limited companies, LLPs and partnerships) subcontractors who work on projects for construction businesses. It’s critical to understand that CIS only applies to self-employed contractors not to full-time employees. Full-time employees are eligible for tax and national insurance deductions under the PAYE scheme.
Instead, under CIS, the contractor withholds a certain amount of payment as tax. This is in contrast to self-employed workers in most other industries, who usually receive the full (gross) amount of their payment and settle their own taxes later.
For construction industry subcontractors, that means that you’ll receive less than your full payment but will not have to deal with taxes. To understand fully, it’s important to learn the difference between a subcontractor and an employee.
Do I need to register for CIS?
To know if you need to register for CIS, you need to know if you are a subcontractor or an employee. A subcontractor is a freelance or self-employed worker who is hired by contractor businesses for specific projects. This is done on an ad-hoc basis. An employee, on the other hand, works full-time for just one business under a contract of employment.
Subcontractors must know when and how to register for CIS status. This is usually done through the government gateway portal along with your standard personal taxes.
Businesses that hire subcontractors are known as contractors. Under CIS, a contractor must register with HMRC as a new contractor. There are several responsibilities that come with this. You must verify that any subcontractors you hire are registered for CIS, then you must withhold tax amounts and pay them to HMRC.
What types of work are covered by the CIS?
CIS applies to all works that come under the construction umbrella. This covers, but might not be limited to:
- Construction work on permanent structures
- Work on temporary buildings
- Civil engineering projects on structures such as bridges and roads
- Digging and laying of foundations
- Building demolition work
- Work that makes alterations to buildings, including repairs and decorating
- Installation work dealing with water, heating, lighting and ventilation
- Any cleaning of buildings after construction.
Other industries that do not have to register for CIS include architecture, scaffolding without labour, carpet fitting, delivery, or any non-construction site work, such as catering.
What is a CIS contractor and how is CIS tax paid?
If your business hires a self-employed subcontractor for any of the above construction works, it should register as a CIS contractor.
As the contractor, you should withhold a certain amount of payments for tax reasons. If your subcontractor is registered with the CIS, you currently withhold 20 per cent of their pay. For non-CIS-registered self-employed workers, you should withhold 30 per cent.
Some subcontractors may register for gross payment status. Under this scheme, you do not withhold any payment for tax. Gross payment status CIS subcontractors arrange their own tax affairs. Any amounts deducted will be paid by the contractor to HMRC as advance tax payments on subcontractors’ year-end tax bills.
what records do subcontractors need to keep?
The contractor must supply a payment statement at least once every month displaying the subcontractor’s name, address, and details of the work done. It’s essential that these statements are retained by both sides for tax purposes.
Subcontractors can still claim for expenses incurred in doing the work. These include, but are not limited to:
- Vehicle expenses
- Tools and materials used for the job
- Any extra or administrative costs.
As with normal expenses, these costs must be incurred solely in doing the work.
The tax deducted by CIS is claimed as a credit when the subcontractor files their Self-Assessment Tax Return.
The CIS scheme can be confusing at first but is simple once up and running. If you have any doubts, you should check with the government website or a trusted accountancy partner.
