The Construction Industry Scheme (CIS) is a scheme created by HM Revenue & Customs (HMRC) for tax from contractors and subcontractors. The scheme is designed to minimize tax evasion within the construction industry. This has such a large number of mobile self-employed workers that a special system had to be designed around them otherwise there is a risk of significant loss to the Exchequer.
CIS applies to all contractors and subcontractors, whether sole traders, partnerships, or companies, who are working within the mainstream construction industry. In addition, many non-construction businesses or organisations, such as property developers, local authorities, and housing associations, that spend annually £1 million or more over a three-year period on construction work must also comply with CIS. The type of work that falls under the term 'construction' includes groundwork, general building (such as bricklaying, plastering, and roofing), alterations, repairs and demolition. If in doubt about whether or not a specific activity falls under CIS, it is recommended to refer to HMRC's guidance.
CIS rules apply to all payments made by a contractor to a subcontractor under a construction contract, but does not apply to employees. Failure to comply with the Scheme may result in expensive penalties.
All contractors and subcontractors must register with the Scheme before any construction starts. Contractors can register using HMRC's online tax registration service. They will need to provide standard information such as the company name, contact details, and the date of the first payday. Other information will also be required from the contractor such as unique taxpayer reference (UTR), NI number, and number of employers. Partnerships and limited companies will need to supply additional information. HMRC will then set up a contractor scheme for the business.
For subcontractors registering, HMRC will need to know the name of the business or the individual's name plus UTR and NI number.
A contractor must do two things before a subcontractor can be paid:
confirm the subcontractor's employment status as self employed. If not, the CIS scheme does not apply and the subcontractor is paid under PAYE via the payroll.
check whether the subcontractor has to be verified to HMRC. If a subcontractor has not been included in the contractor's monthly CIS return in the tax year or one of the two years before the contractor must verify his or her details with HMRC.
Once all the registration and verification processes are complete the contractor will deduct tax at source on any payments made to the subcontractor at one of three tax rates:
30% (excluding VAT and cost of materials or plant hire) from any subcontractor who is not registered under CIS.
20% (excluding VAT and cost of materials or plant hire) from any subcontractor who is registered but who is not eligible to receive gross payments.
No deductions are made on any payment if the subcontractor is eligible to receive gross payments.
Contractors must provide subcontractors with a CIS voucher or certificate confirming any deductions and submit CIS returns to HMRC at the end of each month.
Subcontractors are eligible to receive their payments gross (without tax deduction) if they fulfil three qualifying tests:
Construction work is carried out in the UK, and run largely through a bank account.
For individuals and sole traders, annual turnover is £30,000 or more (excluding VAT and cost of materials). The figure is higher for partnerships and most companies.
There are no outstanding tax returns or payments due. HMRC will ignore minor compliance failures, such as a late filed Self Assessment returns or late payment, but if there is more than one offence HMRC may revoke gross payment status.
At the end of the financial year self-employed subcontractors need to submit a Self Assessment tax return and company contractors a corporation tax return. HMRC will determine what tax or National Insurance is due and offset any CIS deductions made. However in order to claim a refund of CIS tax payment vouchers or certificates must be retained by the taxpayer as evidence of tax deducted. HMRC will not provide details of tax deducted and so it is up to the subcontractor to ensure that he or she retains this essential paperwork.
HMRC operates an extremely tough penalty regime for those within the CIS scheme. Contractors need to ensure that they keep not only their books and records up to date but also that they are not late in submitting returns or making payments of CIS tax deducted.