How does the Construction Industry Scheme (CIS) work for subcontractors?
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If you’re a self-employed builder or tradesperson working as a subcontractor, the CIS scheme is how your contractor will pay your tax so it’s important you understand how it works...
What is the Construction Industry Scheme?
Construction Industry Scheme (CIS) is the way your tax gets paid by your contractor if you work as a subcontractor.
It means your tax will be deducted at source by your contractor and paid to HMRC by them in the form of CIS tax.
This is different from the way tax is deducted if you’re employed, and it’s also different from other self-employed people who are usually responsible for paying their own tax directly to HMRC.
How does CIS work?
First your contractor will have to decide whether you’re actually employed by them or self-employed and working as a subcontractor. You only pay tax under the CIS scheme if you’re self-employed.
If you’re self-employed, your contractor will deduct money from your pay to account for CIS tax. The amount they deduct depends on whether you’re registered with the scheme or not. If you’re registered your contractor will deduct 20% from your pay - leaving you with 80% - and if you’re not registered it will be 30%, which leaves you with 70%.
The deductions only come off your pay, and exclude any amounts for VAT, materials and tool hire.
What do I need to do?
- First you’ll need to register for CIS as a subcontractor. Registering is optional but affects the amount that is deducted. If you register under CIS you’ll get 80% of the amount of your invoices for your work - along with the full amounts invoiced for expenses like materials or tool hire. If you don’t register you’ll get 70%.
- 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.
- When it comes to paying you, your contractor will deduct the amount in line with whether you’re registered or not. They then pay that to HMRC who treat it as an advance payment towards your income tax and National Insurance contributions. It will then be considered in line with your own Self-Assessment tax return.
Things to remember about CIS as a subcontractor
- Even though your contractor is deducting your tax at source, that isn’t the same as being an employee and paying tax via PAYE, and you don’t have the same employment rights.
- If you are working for homeowners rather than for a contractor, this doesn’t fall under the CIS scheme, so your customer will pay you gross on the full amount of your invoice and you’ll pay your tax in line with the government regulations for sole traders or limited companies.
- If you’re working for a contractor as a limited company rather than a sole trader, CIS still applies. You can find government guidance here.
- If you’re VAT registered, CIS deductions aren’t withheld on the VAT element of your invoice. They also aren’t withheld on materials and expenses.
- You can apply to HMRC for something called gross payment status, which allows a contractor to pay you without making any deductions at all, so you should be paid 100% of your invoices.