How does the Construction Industry Scheme (CIS) work for contractors?

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If you’re a contractor who uses self-employed tradespeople, you will be responsible for paying their tax at source through the CIS scheme so it’s important you understand it...

The Construction Industry Scheme (CIS) is a set of HMRC rules that contractors have to follow when using subcontractors.

It means that as a contractor, you have to deduct your subcontractors’ tax payments at source and pay them to HMRC in the form of CIS tax. This acts as an advance payment of your subcontractor’s tax and National Insurance.

CIS Contract 2

Am I affected by CIS?

If you’re a contractor employing self-employed subcontractors, then you should be using CIS.

You also count as a contractor if you spend an average of more than £1 million a year on construction in any three-year period.

Private householders don’t count as contractors so they are not included in the CIS scheme. Some work is also exempt from the scheme, including: architecture and surveying; scaffolding hire (with no labour); carpet fitting; delivering materials and work on construction sites that is clearly not construction like running site facilities.

CIS Registration isn’t instead of registering as self-employed, but as well as. It’s also possible to be a contractor and subcontractor at the same time, so you may have to register as both.

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What does CIS involve?

  • If you meet the criteria above you’ll need to register with HMRC as a contractor. After that HMRC will send you the information you need to start working as a Construction Industry Scheme (CIS) contractor.
  • Next you decide whether the people working for you count as your employees or subcontractors who are self-employed. You can do this using an HMRC tool on employment status. The CIS scheme doesn’t apply to employees who are paid via Pay As You Earn (PAYE).
  • As the contractor, it’s up to you to decide on someone’s employment status when you first employ them. It doesn’t matter if they worked for you in a self-employed capacity before - it’s the terms they’re employed under for the particular job at hand. To find out more, read HMRC’s employment status information. The deductions also vary depending on whether the subcontractor is CIS registered or not.
  • Before you can make a payment to a subcontractor, you need to verify that they are registered with HMRC. HMRC will check that they are and then tell you how much to deduct from their payments, or whether you can pay them without any deductions. Deductions aren’t made from materials and expenses - only from the rest of the payment.
  • If a deduction isn’t required, you just pay the subcontractor in full. If a deduction is required, as the contractor you have to: calculate it, make the deduction, record all the details of the payment, any materials and the deduction, then make the net payment to the subcontractor. You also need to complete and give a statement of deduction to the subcontractor.
  • It’s also your responsibility as a contractor to send HMRC monthly returns of all the payments you’ve made within the CIS scheme or tell them you’ve made no payments. For more information on what to include, visit the HMRC website here. If you don’t report to HMRC with details of your payments and deduction you could face penalties.
  • Every month - or quarter in some cases - contractors have to send HMRC a payment for the deductions they’ve made from subcontractors.

For more information on CIS for contractors visit the HMRC website.

Accounting and tax