Understanding the Construction Industry Scheme (CIS) for Contractors and Subcontractors

[edit] Tax perspectives

The Construction Industry Scheme (CIS) was brought in to help streamline the taxation requirements that result from the working relationship that exists between contractors and subcontractors in the world of construction.

It is important that those working within the construction industry understand what the CIS does and whether you need to be registered as a part of it.

[edit] What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) has been put in place to require contractors to make tax deductions on behalf of their subcontractors. The purpose of this was to help put a stop to many tax avoidance issues as well as making it easier for subcontractors to pay their income tax on time without getting into any financial difficulties.

This puts an obligation on the contractors to carry out the tax deductions so that subcontractors can pay advance tax for the tax year.

It is important to understand that these deductions will count towards the tax and National Insurance of the subcontractors, spreading the payments out over time instead of paying them in one lump sum at the end of the tax year.

All contractors must register for CIS if you hire subcontractors to perform some of your contract work, or if you do not run a construction business but you have spent over £3 million on construction in the 12 months since making your first payment.

Most subcontractors are not required to register for CIS, but if you do, HMRC will calculate deductions at 20% instead of 30%, ensuring that you pay a lower amount to them each month. It is important to remember that this scheme does not apply to payments which are made to employees, as this is covered by the PAYE system.

Contractors are required to pay the tax deducted to HMRC by the 22nd of every month in accordance with the subcontractor's tax status. Subcontractors are able to claim CIS refunds with their National Insurance contributions and their year-end tax deductions if necessary.

[edit] What is a subcontractor?

According to CIS, you will be considered to be a subcontractor if you are a business, agency or self-employed individual who works on a construction project with contractors and receives payment outside of the PAYE scheme.

It is possible to be a contractor and subcontractor at the same time if your business is undertaking subcontracting activities, whilst also working as a subcontractor for other construction businesses simultaneously. In those circumstances, you must follow compliance and taxation procedures separately as both the contractor and subcontractor.

[edit] The benefits of CIS

There are a number of benefits to registering for CIS, whether you are a contractor or subcontractor. They can help to improve cash flow, as contractors will make a 20% deduction for subcontractors with Standard Payment Status, instead of the 30% deduction required for those who are not registered with CIS. It can also help to spread the cost of tax and National Insurance across the year and so subcontractors will find that their monthly deductions count towards their tax and National Insurance bill, avoiding any nasty surprises at the end of the tax year.

[edit] CIS exemptions and changes

As of 6 April 2024, HMRC introduced changes to the Construction Industry Scheme (CIS), particularly around Gross Payment Status (GPS). Subcontractors applying for or maintaining GPS must now meet VAT compliance obligations as part of HMRC’s compliance tests. HMRC also has new powers to withdraw GPS immediately if there are reasonable grounds to suspect fraud or serious non-compliance with VAT, PAYE, Income Tax or Corporation Tax.

In addition, new GPS holders will be reviewed after six months, rather than the previous 12-month period.

There have also been updates to the scope of CIS relating to landlord-to-tenant payments. Certain construction payments from landlords to tenants are now more clearly excluded from CIS, where specific conditions are met. Businesses involved in property development or refurbishment may wish to review these changes with a professional adviser to ensure correct CIS treatment.

[edit] Key CIS dates

Contractors should pay subcontractors within 14 days of each tax month end. It is important to keep in mind how long it is likely to take to process payments within key payment statement submission dates. If payments are not made on time or the correct amount is not paid, then you may be penalised.

[edit] CIS penalties

HMRC will conduct regular contract record inspections to ensure that contractors are fulfilling all of their obligations. If any false declarations have been made, then you could face a fine of up to £3000 per false statement. For the misuse of the construction industry scheme via frequent errors in payments submissions, you will find that the status of gross pay for the contractor will be cancelled.

Contractors who file late returns for the tax month can face penalties of between £100 and £300, depending on the number of months in the delay. There is also a penalty of £3000 for any missing deduction statements or records.

[edit] CIS Compliance

It is essential that all contractors remain compliant with CIS at all times, but this can sometimes be difficult to keep up with. You may therefore require special accountancy help or software to keep track of all payments and ensure that they are made in the correct way and at the right time. This can be very important in avoiding some hefty penalties and ensuring that your subcontractors are paid what they are owed without any added complications.

The construction industry scheme has been designed to help make tax easier to manage for subcontractors, but it requires contractors to have a good understanding of the subject and what their obligations are. It is therefore vital that you understand whether the CIS applies to your situation and that you are clear on what deductions need to be made at any given point in order to make tax easier for subcontractors to manage and for your business to remain compliant, and free from the risk of penalties.

--RogersSpencer