What is the Construction Industry Scheme (CIS) and how does it operate? In the following guide, we will explore how the HMRC scheme works for freelance subcontractors in the UK construction industry.
The scheme was set up by HMRC to collect income tax from those working in the construction industry in a freelance capacity. It aims to combat serious tax evasion and was first introduced in 1971, with various revisions to the scheme over the years.
The CIS scheme determines how payments to subcontractors for construction work must be handled by contractors in the industry. In simple terms, tax is deducted from subcontractors by construction companies and sent to HMRC as monthly tax payments. It is similar to PAYE for employees, only for subcontractors in construction.
Which construction jobs does the CIS scheme apply to?
The majority of work carried out on a construction site is applicable to the CIS scheme and this includes activities such as:
- site preparation
- alterations, repairs and decorating
- demolition and dismantling
- building work
- installation of heating, lighting, power systems etc
For subcontractors that work on both construction and non-construction tasks for the same contractor, the CIS scheme applies and all work they complete is CIS taxed.
Who is exempt from the CIS scheme
There are some groups of subcontractors who fall outside of the CIS scheme. This includes architects and surveyors, as well as those providing scaffolding hire or carpet fitting. Anyone involved in making materials (including plant and machinery) is exempt from the scheme, as well as those responsible for delivering the materials. Additionally, site workers who provide catering or other facilities, such as security or medical help, are not affected by the CIS scheme.
Further HMRC guidance regarding what is and isn’t CIS applicable is available on the GOV.UK website.
Verifying Subcontractors and Making Deductions
It is important to note that all contractors must register for the scheme, as failing to do this could lead to significant financial penalties from HMRC, even if they are paying their own taxes. Subcontractors on the other hand, do not have to register for the scheme, but they will be subject to a higher rate of tax deductions if they do not.
Before the construction company (or contractor) deducts CIS cash, they are required to check that the subcontractor is registered with the CIS scheme. (If they have used the subcontractor within the previous two years, this is not needed) To check a subcontractor’s status, their CIS registration details will need to be confirmed by HMRC.
Once a subcontractor’s details have been verified, the contractor will know how much to deduct from their payment. For workers who have registered themselves with the scheme, this will be 20%, and for those who have not, this will be 30%.
The cost of materials paid for by the subcontractor are exempt from the CIS calculations
What if I’m a contractor and a subcontractor?
For many individuals working in the construction industry, it is possible to be both a contractor and a subcontractor. For example, if James, an electrician, is contracted by a local builder to complete some work, then this would fall under the CIS. If he then subcontracted out some elements of the work to another electrician (Danny) to get the job done quicker, then he must also register as a contractor and pay Danny under the CIS.
The financial burden of the situation outlined above could prove to be quite a challenge for a contractors cashflow, and in this case, it is possible to ask HMRC to be assessed under the ‘gross payment status’ scheme. This means that tax deductions will not be taken from a contractor’s payment, and it will instead be paid gross. The key advantage of this is that the contractor’s business receives all turnover, and just needs to make payment of its tax bill on time to HMRC. Cashflow is therefore more manageable and there is no lengthy wait for the company’s tax rebate.
To qualify for HMRC’s gross payment status, there are various criteria to be met and this includes having a business bank account, making tax and NI payments on time, and having a turnover of £30,000 per director.
Support with CIS
At Kingston Burrowes our payroll specialists can provide full support with the CIS registration, verification and payment process. If you require guidance or support with an aspect of the CIS scheme, don’t hesitate to get in touch to find out how we can help.