The Construction Industry Scheme (CIS) is an integral part of the construction industry, governing the tax obligations of contractors and subcontractors alike.
As a self-employed individual or business owner in the construction industry, understanding the nuances of CIS is non-negotiable.
We’ll explore CIS from both the contractor and subcontractor perspectives, providing you with the knowledge you need to thoroughly understand this scheme and its nuances.
Understanding CIS: the fundamentals
In short, the CIS scheme is a tax deduction scheme designed to collect income tax from construction workers.
Under CIS, contractors must deduct money from subcontractors’ payments and pay it to HMRC.
These deductions serve as advance payments towards the subcontractor’s income tax and National Insurance contributions, helping to ensure a steady flow of tax revenue and prevent tax evasion within the industry.
CIS applies to most construction work in the UK, including site preparation, alterations, dismantling, building work and repairs.
The contractor’s perspective: deduction responsibilities
As a contractor, your journey within CIS begins with registration.
Before engaging subcontractors, you must register as a contractor with HMRC, provide your business details and undergo a verification process.
Once registered, you’ll receive a unique CIS reference number, which you’ll need for all CIS-related transactions.
When hiring a subcontractor, you must verify their CIS status with HMRC to determine the appropriate deduction rate. There are three possible outcomes:
- Gross payment status: No deductions required
- 20% deduction rate: Standard deduction rate for registered subcontractors
- 30% deduction rate: Higher rate for unregistered or unverified subcontractors
Making deductions and payments
As a contractor, you’re responsible for deducting the appropriate amounts from subcontractors’ payments based on their verification status.
This involves calculating the deduction amount, issuing a payment and deduction statement to the subcontractor, and keeping accurate records of all CIS transactions.
You must pay the deducted amounts to HMRC monthly and a CIS return detailing all the deductions made. These payments are due by the 19th of each month, and failure to pay on time can result in penalties and interest charges.
Year-end responsibilities
At the end of the tax year, contractors must provide a CIS statement to each paid subcontractor.
This statement summarises all the payments and deductions taken, helping subcontractors complete their tax returns accurately.
The subcontractor’s perspective: maximising tax efficiency
As a subcontractor, your first step is registering with HMRC for CIS. This process involves providing your personal and business details and Unique Taxpayer Reference (UTR) number.
Registration is crucial, as it determines your deduction rate and affects your cash flow.
If you meet certain qualifying criteria, you can apply for gross payment status, allowing you to receive contractors’ payments without any CIS deductions.
To qualify, you must pass business, turnover and compliance tests. Gross payment status will improve your cash flow and simplify tax management.
Managing deductions and expenses
If you don’t have gross payment status, contractors will make CIS deductions from your payments at either the 20% or 30% rate.
These deductions are credited against your income tax and National Insurance liabilities. It’s essential to keep accurate records of all the deductions, as you’ll need this information when completing your tax return.
Submitting your tax return
At the end of the tax year, subcontractors must complete and submit a Self-Assessment tax return to HMRC. This return should include all income, including CIS payments and allowable expenses.
The CIS deductions made by contractors will be credited against your tax liability, and depending on your individual circumstances, you’ll either receive a refund or have to pay additional tax.
Summing up
The CIS can seem complex at face value. However, with a clear understanding of the roles and responsibilities of both contractors and subcontractors, you can tap into its benefits, whether you’re a contractor or sub-contractor.
At Blue Shore, we understand the challenges contractors and subcontractors face when dealing with CIS.
Our experienced team of accountants have specialist knowledge in the construction industry and are here to provide expert guidance tailored to you and your business.
Don’t hesitate to contact us today, and let us help you manage the complex dynamics of CIS.
