If you’re a contractor in the construction industry, you will likely work with various subcontractors depending on the skills that each project needs. The Construction Industry Scheme was created to allow you to deduct tax from your subcontractors’ pay at source and pay it to HMRC direct. Here’s how it works.
How does the Construction Industry Scheme work?
The Construction Industry Scheme (CIS) allows you to deduct tax from your subcontractors’ earnings before you pay them for their work. These are treated as advance payments towards their income tax and National Insurance for that year, so they will be taken into account when they complete their self-assessment tax return. However, they’ll still be classed as self-employed subcontractors as they should carry out work for other contractors throughout the year.
You’ll need to provide your subcontractors with a pay slip showing how much tax you’ve deducted and what their net pay is. This enables them to demonstrate their earnings to HMRC and claim refunds or rebates if necessary.
Is the scheme compulsory?
If you’re a contractor, you must register for the Construction Industry Scheme. The registration can be completed online. (https://www.gov.uk/what-you-must-do-as-a-cis-contractor/how-to-register) You’ll also be able to complete your monthly returns to HMRC using the online portal. You’ll need to sign up if your company isn’t based in the UK but you carry out work here. You can find out more about that here.
Subcontractors can choose whether to register or not. However, if your subcontractor chooses not to register, you’ll still need to take a deduction and pay it to HMRC. If they’re registered, that will only be a 20% deduction, but it rises to 30% if they aren’t. That means less money in their pocket, incentivising them to sign up.
Am I a contractor?
HMRC considers you a contractor if you carry out construction work and make payments to subcontractors. You’ll also be classed as a contractor if you’ve spent more than £3 million on construction work in the 12 months since you made your first payment. This rule applies even if your business doesn’t do construction work.
You’ll be considered a subcontractor if you work for a contractor carrying out construction work. This means you can be both if you pay subcontractors and carry out work for other contractors, and you’ll need to register accordingly. You can learn more about what you need to do as a subcontractor here.
What types of work are covered by CIS?
The scheme covers most types of construction work, including everything from preparing the site and carrying out construction work and alterations to cleaning and decorating the inside of a new building. In addition, it includes different types of projects, whether you’re constructing a building or a new bridge.
There are a few exceptions which mainly apply to workers who contribute to the process but aren’t part of the main construction work. This can include surveyors, equipment and materials suppliers or on-site caterers. It’s wise to seek professional guidance on whether the scheme covers your work. HMRC’s website also offers general guidance. (https://www.gov.uk/government/publications/construction-industry-scheme-cis-340)
If you need to pay tax via the Construction Industry Scheme, we are here to help; simply complete the form: