The Construction Industry Scheme or CIS is a UK based tax-deduction scheme, introduced by HMRC in 1971. The scheme was launched to combat the often-rampant tax evasion in the construction industry. The CIS concerns payments from contractors to sub-contactors but only if the sub-contractor is self-employed. The idea behind the scheme is that tax is collected at the source, rather than being paid at a later date. This therefore side-steps any potential tax evasion that could take place.
When ascertaining if you or your business should register for CIS, there can be many questions to answer. What counts as construction work? Who is and isn’t eligible for the scheme? Etc.
Who Should Register for CIS
When it comes to the Construction Industry Scheme and who qualifies for registration, there are a number of prerequisites.
Firstly, the scheme is only applicable to those who are working in the construction industry, however this can include many different entities. The scheme covers both temporary and permanent structures and a variety of different work types, including building works, demolition, modification, repairs and installation. If you’re unsure on whether a specific type of construction work is covered by CIS, full details can be found online.
Once you’ve established if the work you’re completing is covered, your next step is to establish if you’re a contractor. A contractor is any individual or business that outsources work to another individual or business- who would then become a sub-contractor. Even if you’re completing work yourself and you pass on some of this work to another trades person, you’re technically a contractor.
An important aspect of CIS is that it only applies to situations in which a sub-contractor is self-employed. If it’s an employer, providing work to an employee, then the CIS doesn’t apply. Deciding if a worker is an employee or a sub-contractor can sometimes be difficult, particularly in the construction industry when these lines can sometimes become blurred. Again, there is more detailed advice online for those who need more assistance.
It’s worth noting that sometimes businesses outside of the construction industry should also register for CIS. Specifically those who have spent over £1 million a year on construction, in any 3 year period.
How does CIS work?
Now that we have ascertained who should register for the Construction Industry Scheme, how does the scheme actually work?
When a contractor pays their worker, in this case a sub-contractor, they must deduct a percentage from the payment and pay this directly to HMRC. This acts as a proactive tax payment, deducted at the source. The amount that is deducted will differ according to whether the sub-contractor is also registered for CIS. There is no legal obligation for a sub-contractor to register but it is recommended as it makes the individual or business more attractive and legitimate. Another benefit for sub-contractors who register for CIS is that it reduces the deduction made to payments from contractors.
Contractors must deduct 20% from payments to sub-contractors who are registered with CIS and 30% for sub-contractors who aren’t registered. This money is then paid to HMRC and will be allocated against the sub-contractors national insurance and income tax. Then, when the sub-contractor completes their tax return, they can reclaim any overpayments.
It’s worth noting that CIS registration is applicable to self-employed individuals, limited companies and those who are VAT registered.
It’s fair to say that Construction Industry Scheme can be complicated, particularly for those who are new to the industry. Fortunately, the team at Taxation Investigation can provide solutions, including expert advice on registration and potential disputes.