The Construction Industry Scheme (CIS) is a way for contractors to deduct money from payments they make to subcontractors and pay it directly to HMRC.
These payments count towards the subcontractor’s tax and National Insurance payments.
What do you need to do as a contractor?
The CIS applies to sole traders, partnerships and limited companies.
The important bit is knowing if you pay subcontractors to do construction work, or if you don’t carry out construction but have spent more than £3 million on construction in the 12 months since you made your first payment.
If you fit into either of these categories, you must register as a contractor.
If you’re a contractor, there are six rules you must follow to ensure you’re doing everything right:
- Register for CIS before you take on your first subcontractor
- Check whether you should employ the person rather than subcontract the work to them
- Check with HMRC that your subcontractors are registered with CIS
- Make deductions from the money you pay to your subcontractors and pay the money to HMRC
- File monthly returns and keep full CIS records
- Let HMRC know about any changes to your business
How do you make deductions?
Once you have verified your subcontractors, you know which rate you need to deduct (20% if registered or 30% if not).
If a deduction is required, you need to:
- Calculate the deduction on the part of the payment which does not represent the cost of materials incurred by the subcontractor
- Make the deduction
- Record the payment, materials and deduction
- Make the net payment to the subcontractor
- Complete and give the appropriate statement of deduction to the subcontractor
What’s included in the monthly returns?
Every month, you have to complete and send a return to HMRC including:
- Details of the subcontractors
- Details of the payments made and any deductions withheld
- Declaration that you’ve considered the employment status of the subcontractors
- Declaration that you’ve verified the subcontractors
What do you need to do as a subcontractor?
As a subcontractor, you also need to register for CIS.
Once you’re registered, the contractor deducts 20% from your pay and passes this directly to HMRC as an advance on your tax and National Insurance.
The contractor must deduct 30% from your payments if you’re not registered on the scheme.
If you would rather handle your own tax payments, you can apply for “gross payment status”.
What is gross payment status?
If you have gross payment status, the contractor pays you in full, without any deductions.
There are three things you need to show HMRC before they will consider you for gross payment status:
- You’ve paid your National Insurance on time in the past
- Your business does construction work in the UK
- Your business is run through a bank account
If you meet all three of these, HMRC will then look at your turnover for the last 12 months. If you ignore the VAT and cost of materials, your turnover must be at least:
- £30,000 if you’re a sole trader
- £30,000 for each partner in a partnership, or at least £100,000 for the whole company
- £30,000 for each director of a company, or at least £100,000 for the whole company
If you qualify for gross payment status, you must declare your payments at the end of the tax year, either through your Self Assessment tax return or your company’s Corporation Tax return.
For more detailed advice, please see this guide by HMRC.