Updated: Dec 11, 2021
The Construction Industry Scheme (CIS) has been around for a long time now but people still find it confusing. So I thought I would try to explain a little about who needs to register and what that means in terms of paying a sub-contractor.
The first Construction Industry Scheme (CIS) was introduced by the HMRC in 1972 designed to deal with tax avoidance. The Scheme we use today was launch in 2007.
The rules of CIS.
If you are a contractor or a sub-contractor you will need to register with the HMRC when you start in business either as self-employed, a partner in a firm or as a Limited Company. You are required to do this as soon as you know you are going to employ sub-contractors or you are going to be working for another business as a sub-contractor.
Register your business here: https://www.gov.uk/set-up-business
Work covered by CIS
CIS covers most construction work to:
a permanent or temporary building or structure
civil engineering work like roads and bridges
For the purpose of CIS, construction work includes:
preparing the site, e.g. laying foundations and providing access works
demolition and dismantling
alterations, repairs and decorating
installing systems for heating, lighting, power, water and ventilation
cleaning the inside of buildings after construction work
You do not have to register if you only do certain jobs, including:
architecture and surveying
scaffolding hire (with no labour)
making materials used in construction including plant and machinery
work on construction sites that is clearly not construction, e.g. running a canteen or site facilities
The Construction Industry Scheme (CIS) is the system used by contractors to pay sub-contractors for construction work and how the rules for deduction of tax for the CIS must be applied. These deductions are the amounts the contractor must deduct towards tax and national insurance. As soon as these deductions are made by the contractors they transfer the money deducted to HMRC.
It is the duty of the contractor to verify sub-contractors.
Verification is the process used to ensure that sub-contractors have the correct rate of deduction applied to their payments under the scheme which has been agreed with HMRC.
When you start any business, you must let HMRC know and register for self assessment or set up a limited company.
Once this registration process has happened you will be given a Unique Taxpayer Reference number (UTR) which is the number that will be used for the verification of CIS.
There are three main steps to the process of verification that a contractor must follow:
The contractor contacts the HMRC with details of the sub-contractor.
HMRC checks that the sub-contractor is registered with them.
HMRC tell the contractor what rate of deduction to apply, if any.
Before a contractor can make a payment for construction work to a sub-contractor, they must decide whether they need to verify the subcontractor. The rule is that a contractor does not have to verify a sub-contractor again if they included them on a tax return within the current or two previous tax years.
The verifying process can be achieved via this link
Verification reference number
When a sub-contractor is verified the contractor will be given a verification reference number.
Paying the sub-contractor
If a contractor does not have to verify a sub-contractor, for the reasons given above (previously paid within current or two previous tax years) they must pay on the same basis as the last payment made to them unless HMRC have previously told you otherwise.
This means that:
if the sub-contractor was last paid under the standard rate of deduction, the current payment must be the standard rate.
if the last payment was made gross, because a deduction was not required, the current payment must also be gross.
Different levels of tax deductions
There are different levels of tax that might be deducted at source from a CIS Invoice and these would be:
Some sub-contractors can be paid gross so there are no deductions to be made towards tax and N.I. meaning that the sub-contractor will be responsible for paying their own tax and N.I. so the contractor does not need to deducted anything.
If the sub-contractor has been verified and are not to be paid gross, then HMRC will inform you that 20% will need to be deducted from any payments made to the sub-contractor. Be aware you only deduct 20% from the labour not the materials on an invoice. The subcontractor will still be required to pay tax/N.I. due on their tax return but HMRC will offset any deductions against the bill
If the sub-contractor has not been verified and matched by HMRC then deductions are set at 30%. The sub-contractor would be able to register in the future for the lower 20% deduction rate, but any deductions already made by the contractor cannot be refunded by the contractor. If 30% deductions are made, then you would have to wait until the end of the tax year and show all payments against all deductions. Then when HMRC process your return they will pay any refund due to you.
If you need any help with CIS or any admin/accounts tasks, then please get in touch as I would be happy to help.
Do not know whether to register as a Limited Company or a Sole Trader, check out my blog 'Limited Company vs Sole Trader'