Work as a contractor in the construction industry? Here's all you need to know about CIS
Posted on 12th December 2019 at 13:09
The Construction Industry Scheme – or CIS – is a scheme brought in by HMRC in 1971 to help minimise tax evasion in the construction industry at the same time as protecting construction workers from false employment.
Contractors participating in the CIS are required to deduct money from their subcontractors’ pay, in order to cover their tax and NICs. If you are a contractor in the construction industry then you must be registered. It is also worth noting that if you are not in the construction industry but your business spends an average of more than £1 million per year on construction in any three-year period, then you must also register for the scheme – companies that this would typically affect may be property developers or housing associations. Subcontractors are not required to register but we recommend that they do.
If the subcontractor is registered for CIS then the deduction stands at 20% - and if the subcontractor is not registered under the scheme then it increases to 30% - so it pays to be registered! These deductions are then paid by the contractor to HMRC as an advance payment towards the subcontractors’ tax liabilities.
If your business is based outside the UK but you do construction work as a contractor or subcontractor in the UK, then you will also need to be registered. The gov.uk website has a fully comprehensive document about the scheme, which you can access here.
Is the Construction Industry Scheme just for limited companies?
Both limited company directors and sole traders can participate in the CIS, however the rules are slightly different in each situation. For limited companies, any CIS deductions made by a contractor from income due to the company can be offset against the company’s corporation tax. Alternatively, HMRC can refund it to the subcontractor at the end of the tax year. Sole traders are in a similar position however their CIS deductions are offset against their income tax, or personal tax liability, and will be noted in the self-assessment.
So what counts as construction work for the purpose of CIS?
Anything that involves preparing a building site, demolition and dismantling, building work itself, alterations, repairs, decorating, installation of systems such as heating, lighting, power, water and ventilation and even cleaning the insides of buildings after any construction work counts as construction work under the CIS.
For avoidance of doubt, you do not have to be CIS registered if you are an architect, a surveyor, a scaffolding hire company or a carpet fitter as long as you do not carry out any of the jobs listed above.
If you work on a construction site but do not partake in any construction work – e.g. if you are a chef in a staff canteen or you deliver materials to people working on the site – then the same rules apply and you do not have to be registered.
CIS example if you are a subcontractor
If you are a subcontractor and you operate via a limited company or as a sole trader, the contractor who has engaged you in the work will pay you or your limited company after they have deducted the 20% or 30% (as applicable) for CIS payments.
The main contractor will be filing a monthly report to HMRC showing the deductions made from all of their subcontractors, including your limited company or you personally if you are a sole trader.
If you are a subcontractor operating via a limited company, then your company will include the CIS amount deducted by the contractor through an Employment Payment Summary (EPS). Your limited company must submit an EPS to HMRC throughout the tax year as part of its PAYE arrangements. HMRC then calculates your company’s reduced corporation tax liability by calculating the total amount of CIS deductions made by the contractor. Any leftover CIS credit will be refunded back to your company.
If you are a sole trader then you should include the CIS amount that the contractor you have subcontracted under has deducted from your payments throughout the year on your annual self-assessment. This will reduce your tax bill as appropriate and, as with limited companies, any CIS credit left over will be refunded to you directly.
CIS example if you are a contractor engaging subcontractors
If you’re a limited company and you engage subcontractors to do work (and none of that work is for another contractor), then your company must produce a monthly statement for HMRC that details the amount of CIS deducted from your subcontractors. Your limited company then makes the deduction payments directly to HMRC.
If you’re a sole trader and you engage subcontractors to do work (and none of that work is for another contractor), you will need to run a CIS payroll and – similar to the limited company example – you will need to produce a monthly report for HMRC and make all the required payments to them.
CIS example for limited companies working for a contractor and also engaging subcontractors
If you're operating via a limited company as a subcontractor to a contractor, but you are also paying subcontractors to provide work, you will have to ensure you are combining the two previous examples.
The contractor who is paying you will be making the necessary CIS deductions from its payments to your limited company, and your limited company will be making the necessary CIS deductions from the payments it makes to its own subcontractors.
If you work in any part of the construction industry and you have any doubt about whether you need to be registered for the scheme, the gov.uk website has more details in a fully comprehensive guide which you can find here.
If you’d like tailored advice on your individual situation then please do not hesitate to get in touch by booking a call or sending us an email. We’d love to help – that’s what we’re here for!
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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