A guide to the Construction Industry Scheme (CIS)
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If you’re a self-employed builder or tradesperson working in construction, it’s likely you’ll come across the Construction Industry Scheme (CIS) so it’s worth understanding it.
The Construction Industry Scheme (CIS) is a set of HMRC rules that contractors have to follow when using subcontractors. A contractor is anyone, whether a sole trader or limited company, who employs the service of another, regardless of their status.
It basically means that money is deducted from subcontractor’s wages and paid to HMRC in the form of CIS tax, which acts as an advance payment of the subcontractor’s tax and National Insurance.
This is different from being employed, and it’s also different from self-employed people in other industries, who usually get their payments without any tax deducted.
How does CIS work?
When a contractor uses a subcontractor, they have to decide whether that subcontractor is self-employed or should be employed by them.
If they decide they’re self-employed, and the services they provide fall under the remit of CIS, the contractor will need to deduct money from their pay to account for CIS tax. That means the sub-contractor will be paid either 80% or 70% of their invoice totals, excluding any amounts for VAT, materials and tool hire.
For CIS, a contractor is anyone who uses a subcontractor for work in construction or who spends over £1million a year over a three-year period. A subcontractor is someone who is employed by a contractor. Some people might fall into both categories.
What works fall under CIS?
CIS covers most construction work across different trades.
Jobs that are covered:
- Preparing the site, e.g. laying foundations and providing access works
- Demolition and dismantling
- Building work
- Alterations, repairs and decorating
- Installing systems for heating, lighting, power, water and ventilation
- Cleaning the inside of buildings after construction work
Jobs that are not covered:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Manufacturing of materials and plant machinery used in the construction industry
- Delivering materials
- Work on construction sites that’s clearly not construction, e.g. running a canteen or site facilities
See the Government’s site for more details of what is and isn’t covered by the scheme.
What does CIS mean for contractors?
If you’re a contractor then you should register with HMRC for CIS.
You need to decide whether your workers are employed or self-employed. You can do this using an HMRC tool on employment status. You’ll then be responsible for making the right deductions from contractors, depending on whether or not they’re CIS registered.
All contractors have to report to HMRC with details of payments and deductions they have made. Not doing so could lead to penalties.
What does CIS mean for subcontractors?
Registering for CIS as a subcontractor is optional, but if you don’t your deduction will be higher - 30% instead of 20%.
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%.
The money deducted by your contractor under CIS is then paid by them to HMRC who treat it as an advance payment towards your income tax and National Insurance contributions and will be considered in line with your own Self-Assessment tax return.
Things to keep in mind
- Any work that falls under the guise of CIS should be paid through the CIS scheme, no matter how small or large.
- If you supply construction services directly to homeowners rather than to a contractor, this doesn’t fall under CIS so the customer still pays you gross on the full amount of your invoice.
- 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.
- You can apply to HMRC for ‘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.
- If you trade as a limited company, CIS applies to companies as well as to individuals. You can find government guidance here.
- If you’re VAT registered, CIS deductions aren’t withheld on the VAT element of your invoice.
CIS might seem like an inconvenience, but once you’ve got your head around it, it’s easy enough to keep on top of.