Guide to the Construction Industry Scheme

7th August 2017

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) was introduced by HMRC as a measure to counteract tax evasion within the construction industry, given the high number of mobile, self-employed individuals within this area.

Under the CIS, contractors in the construction industry must deduct money from subcontractors’ payments and pass it to HMRC directly. The deductions then count as advance payments towards the subcontractor’s tax and National Insurance.construction industry scheme

Who does the CIS apply to?

CIS applies to all contractors and subcontractors, be that sole trader, partnership, organisation or company, who are working within the UK construction industry. Additionally, many non-construction businesses or organisations, such as property developers, local authorities, and housing associations that spend £1 million or more p.a. over a three-year period on construction work must also comply with CIS.

The CIS rules apply to all payments made by a contractor to a subcontractor for the duration of a construction contract. However they do not apply to direct employees of the contractor.

The type of work that classifies ‘construction’ under the CIS includes groundwork, general building (such as bricklaying, plastering, and roofing), alterations, repairs and demolition.

What is the difference between a contractor and a subcontractor?

No prizes for guessing that the contractor is the business or person who directly deals with and supplies material and/or labour to the client and the subcontractor is anyone who carries out construction work on behalf of the contractor.

However, it is important to clearly differentiate between the two in relation to the CIS, as this dictates individual responsibilities on each side.

Within the CIS, HMRC classifies contractors as:

  • Those who pay subcontractors for construction work
  • A business, individual or organisation that spends an average of £1 million or more p.a. on construction in any 3-year period

A subcontractor is classed as:

  • Any individual, body or organisation that is paid to undertake construction work by a contractor
  • Any type of business can be classified as a subcontractor, be it a sole trader, partnership, or limited company. It is important to recognise that a subcontractor is not necessarily a self-employed individual working on different construction projects. Equally, a large corporation could classify as a subcontractor within the CIS.
  • More confusion may arise when the work is subcontracted through a third party. Although the agency or business may not be carrying out the work themself, they would still class as the subcontractor as they are being paid directly by the contractor. Even local authorities and some other public bodies that organise construction work can be classed as subcontractors.
  • An organisation/individual can be both a contractor and subcontractor at the same time. For example, a local building firm could be contracted by a local authority to carry out some work, and would therefore register as a subcontractor. However, if they then subcontracted out some elements of the work then they must also register as a contractor.

CIS requirements

In advance of a construction project, all contractors and their subcontractors must register with the CIS.

Registration for Contractors

Contractors much register as an Employer with HMRC. This can be done at https://www.gov.uk/register-employer You must register before the first payday and the process can take up to 6 weeks. You can’t register more than 2 months before you start paying people.

Once registered, you’ll receive a letter from HMRC that gives you all the information you need to start working as a CIS contractor.

Registration for Subcontractors

Sole traders can register for the CIS online by logging in with their Government Gateway ID. HMRC will need to know the name of the business or the individual’s name plus UTR and NI number.

For limited companies and partnerships there is an online CIS305 form https://www.gov.uk/government/publications/construction-industry-scheme-company-registration-cis305 and for partnerships there is the CIS304 form* https://www.gov.uk/government/publications/construction-industry-scheme-partnership-registration-cis304

If you are registering as a subcontractor, make sure you use the same name and business address for your contractor as you did when registering with CIS, otherwise they will not be able to verify your CIS status.
*Please be aware that HMRC will register the partnership separately to the sole trader registration and will need the partnership UTR and trading name.

Subcontractor Verification

A contractor must verify a subcontractor with HMRC before they can be paid. This can be done online and will confirm:

  • Whether the subcontractor is registered for the CIS
  • What rate of deduction to use or if the contractor can be paid gross

If a contractor hasn’t included the subcontractor on a CIS return in the current or last two tax years then they will need to reverify them.

Deduction and payment of subcontractor tax

Once everyone is registered and the verification processes are complete, then the contractor is responsible for deducting the right amount of tax at source for any payments made to the subcontractor. This will be at one of three rates:

  • 30% (excluding VAT, fuel, plant hire and cost of materials and equipment) from any subcontractor who is not registered under CIS
  • 20% (excluding VAT, fuel, plant hire and cost of materials and equipment) from any subcontractor who is registered with the CIS but is not eligible to receive gross payments
  • No deductions are made if the subcontractor is eligible to receive gross payments

Any subcontractor who has not registered with the CIS will automatically have tax deducted at a rate of 30%.

There are instances where a subcontractor can apply for “gross payment” status and have no money deducted from their pay cheque from the contractor. For this they will need to fulfil three qualifying tests:

  • Business test
    Construction work is carried out in the UK and run primarily through a bank account
  • Turnover test
    Annual turnover is £30,000 or more (excluding VAT and cost of materials) for individuals or sole traders. For partnerships or companies the threshold is £30,000 for each partner/director and at least £100,000 for the whole partnership/company
  • Compliance test
    There are no outstanding tax returns or payments due. HMRC will ignore minor compliance failures, but with more than one offence, HMRC may revoke gross payment status.

In this instance the subcontractor is responsible for paying all tax at the end of the year and HMRC will check each year for ongoing qualification of this status.

It is important to note that HMRC will not provide details of tax deducted for any future Construction Industry Scheme refund claims and the subcontractor must ensure that they retain their CIS tax payment vouchers and certificates.

Monthly Payments and Reporting

Each month, the contractor must provide the subcontractor with a CIS voucher or certificates, which outlines any deductions made. At the same time they must submit their CIS returns to HMRC and ensure that the CIS deductions are paid.

Penalties

The penalties are quite severe for CIS late filing; even missing the deadline by one day will result in a £100 penalty. That fine rises to £200 up to 2 months late then £300 or 5% of the CIS deductions on the return (whichever is higher) at both 6 and 12 months late. Any returns later than this and there could be an additional penalty of up to £3,000 or 100% of the CIS deductions (whichever is higher).

Equally, submission of inaccurate information is heavily penalised. Giving the wrong employment status for a subcontractor can trigger a penalty of up to £3,000.

We can help with Construction Industry Scheme compliance

If your business is impacted by the CIS, then our team at TTR Barnes can help to navigate the legislation. Please contact our specialist Geoff Talbot, who is able to assist you in set-up, implementation and ongoing upkeep of your CIS business requirements.

geoff talbot

Geoff.Talbot@ttrbarnes.com

0191 567 0304

You can also contact HMRC directly at the CIS Helpline

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.