The Construction Industry Scheme (CIS) sets out the rules on how payments from contractors to subcontractors for construction work should be handled. The scheme was formed by HM Revenue & Customs (HMRC) and was implemented in order to minimise tax evasion in the construction industry.
CIS rules that all payments made to subcontractors by contractors should take into account the subcontractors tax status – as determined by HMRC. The scheme is applicable to both individuals and companies; therefore it is important that those affected have a full understanding of their own responsibilities.
What work does the CIS cover?
The CIS covers all construction work carried out in the United Kingdom and its territorial waters (up to the 12 mile limit). Jobs covered by the scheme include site preparation, alterations, dismantling, construction, repairs, decoration, and demolition. Work undertaken outside of the UK is not covered by the scheme; however non-UK businesses that are carrying out work within the UK are affected.
The CIS scheme determines that a contractor is a business or other entity that pays a subcontractor to carry out construction work. This includes companies, partnerships, and self-employed individuals. Businesses that do not do construction work but regularly spend over £1 million a year on construction must also register. A subcontractor is determined as a business that carries out construction work for a contractor.
All contractors must register with HMRC for CIS. Registration should be made when a contractor is about to take on their first subcontractor. Additionally, subcontractors should also register. They should do this when they are about to start work in the construction industry.
How does it work?
Once registered, contractors are required to confirm that the subcontractor is self-employed and also check that they are registered for CIS. These two duties should be performed before payment is made.
Payments which are made by contractors to subcontractors must take into account the subcontractors tax status. The contractor may be required to make a deduction which is then payable to HMRC. Deductions should only be made from the labour part of the payment and not from material costs or VAT. If no deduction is required, the contractor can make the payment in full to the subcontractor.
If a deduction is required, the contractor is obligated to:
- Calculate and make the deduction
- Record the details of the deductions
- Make the net payment to the subcontractor
- Give a statement of deduction to the subcontractor
Each month, contractors are required to provide HMRC with a complete return of all payments made under the scheme. Furthermore, they should send payment monthly, or in some cases quarterly, to HMRC. There are many computer software packages available in order to manage CIS duties.
HMRC will inform the contractor of how much to deduct from a subcontractors payment when they verify the subcontractors status. This will be 30% (unregistered), 20% (registered) or 0% (gross payment status). It is usually possible to for a subcontractor to claim a CIS tax rebate at the end of each tax year.
Contractors should send their monthly returns to HMRC by the 19th of each month. Strict penalties are imposed for late filing ranging from £100 for 1 day late to £300 (or 5% of CIS deductions) for 12 months late. Returns made later than this could get a further penalty of £3,000 or 100% of CIS deductions.
More information on the Construction Industry Scheme is available at https://www.gov.uk/business-tax/construction-industry-scheme