The Construction Industry Scheme (CIS) was created by the government to reduce tax avoidance and evasion practices in the construction industry.
In essence, CIS payroll ensures that money is deducted from payments made to self-employed construction contractors in a very similar way to PAYE for employees.
The CIS deductions are paid to HMRC as an advance payment on the tax and NICs due on the income. At the end of the tax year, CIS contractors are required to complete a tax return and if too much tax has been paid through the CIS deductions then a refund will be due.
All contractors have a duty to register to CIS through HMRC and should do so when they taken on their first subcontractor, regardless whether that subcontractor will be paid gross or with a deduction. CIS determines that every payment from a contractor to a subcontractor must take the latter’s tax status as determined by HMRC into account.
Who should apply for CIS?
CIS was specifically created for businesses and contractors working in the construction industry in the UK (up to 12 miles into territorial waters), and includes companies, partnerships and self-employed workers.
Businesses can include contractors, subcontractors, and those acting as both contractors and subcontractors. Be aware though that ‘contractor’ and ‘subcontractor’ have different definitions according to the government for CIS purposes
· A contractor is the business that contracts with a client to undertake construction services and pays subcontractors for their construction work. A contractor is also a business that doesn’t do construction work but spends an average of more than £1 million a year on construction in any 3-year period. Contractors can be any entity including companies, building firms, government departments, local authorities and more.
- A subcontractor is a business that carries out the construction work when hired by a contractor.
- Contractors and subcontractors are businesses that perform construction work for other businesses. They must each follow contractor and subcontractor rules and definitions accordingly.
Whilst contractors are required to register for CIS, subcontractors are not. However, the benefit to the subcontractor of registration is the reduction in the deduction from payments made to them.
The CIS deduction rates are:
- 20% for registered subcontractors.
- 30% for unregistered subcontractors.
Subcontractors who don’t want deductions at the 30% rate should sign up to CIS. The scheme does not apply to employees, and only to construction work as defined in the rules.
Construction work includes (but is not limited to):
- Preparing a construction site.
- Site alterations.
- Dismantling a site.
- Site repairs.
The tax implications of CIS
CIS is designed to help contractors meet their tax obligations as well as negating tax avoidance schemes.
CIS deductions from a contractor are paid to HMRC on the subcontractor’s behalf, and act as advance payments towards the latter’s annual income tax.
Often subcontractors under CIS overpay tax due to the deductions so will need to claim a refund when they do their annual tax return.
By registering with a subcontractor under CIS, individuals can benefit from tax rates of 20%, subject to circumstances. Those who do not register for CIS will have tax deductions taken at a higher 30% rate.
CIS spreads individuals’ income tax burden throughout the year in line with their income through CIS, making their lives easier.
Benefits of signing up to CIS through an intermediary
If a recruitment agency sources your work they will often require you to be paid through an intermediary that specialises in CIS.
One reason is that the CIS deductions are made at source (i.e. before you receive your pay), and the company processing those CIS deductions has to submit monthly returns to HMRC.
These returns must include details of all payments made to all subcontractors within CIS in the preceding month, and at which rate the deductions were made, i.e. gross, standard (20%) or higher (30%).
Given the level of detail involved, agencies will usually outsource CIS payments to a specialist intermediary.
Most intermediaries will thoroughly vet all of their self-employed CIS workers to ensure that they are genuinely self-employed, and they will also ensure that you understand your tax position.
The intermediary will often be able to provide support to CIS workers in completing their annual tax return, which is a helpful service at a small cost. Some intermediaries also provide insurance cover for their CIS workers irrespective of any individual cover that the CIS worker might already have.
A trusted CIS intermediary that has experience working with contractors and subcontractors in the construction industry will also help you sign up to CIS quickly and effectively, allowing you to concentrate on your work.