The Construction Industry Scheme (CIS) is a scheme set up by HMRC which considers how much tax a subcontractor, not an employee, should pay. Due to the vast amounts of contracted work within the construction sector, the scheme was set up to decrease the loss of revenue which isn’t properly accounted for and therefore incorrectly taxed resulting in the taxpayer suffering.
The CIS is basically a set of rules which regulate how contractors should make payments to sub-contractors. Contractors must register for the scheme, who are defined as any organisation that spends more than an average of £1 million a year on construction operations over a three-year period. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate (30% as opposed to 20%) if they’re not registered.
We break down the ins and outs of the CIS, who it essentially affects and the future impact of the scheme…
What Is The Construction Industry Scheme (CIS) & Who Does It Affect?
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance. CIS covers most construction work such as:
- a permanent or temporary building or structure
- civil engineering work like roads and bridges
For the purpose of CIS, construction work includes:
- preparing the site – for example, laying foundations and providing access works
- demolition and dismantling
- building work
- alterations, repairs and decorating
- installing systems for heating, lighting, power, water and ventilation
- cleaning the inside of buildings after construction work
You do not have to register if you only do certain jobs, including:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that’s clearly not construction – for example, running a canteen or site facilities
It is important to note that despite a contractor withholding tax on payments made to a subcontractor, possibly documented in the form of payslips, the subcontractor is not being treated as an employee and therefore will not be entitled to any employment rights. Although there are a high number of self-employed workers in the construction industry who qualify as sub-contractors, employment status needs to be given careful consideration as it greatly affects wages, employment rights and tax status.
Can You Reclaim Under The Construction Industry Scheme (CIS)?
You can claim a repayment of your CIS deductions if you’re a limited company subcontractor, or an agent of a limited company, and you’ve paid too much tax or National Insurance. This can be done online, through the HMRC portal, or by post.
When you’re registered with the Construction Industry Scheme (CIS), you’re still responsible for paying the correct tax and National Insurance for your business, even if deductions have been made by contractors throughout the year. Contractors will give you a monthly statement of what they’ve paid you and deductions they’ve made to help with your accounting.
If you are a sole trader or partner, you should send in your usual Self-Assessment tax return at the end of the tax year to HMRC. HMRC will then calculate your tax and National Insurance amount, subtracting any deductions made by contractors. Your Self-Assessment return It should include:
- the full amounts on your invoices as income
- any deductions contractors have made in the ‘CIS deductions’ field
If you are set up as a Limited Company and have gross payment status, you will need to declare all your income in your Corporation Tax return as usual. If you pay CIS deductions, you must claim these back through your company’s monthly payroll scheme. Do not try to claim back through your Corporation Tax return as there’s a chance you could get a penalty from HMRC for incorrect filing.
What Is The Future For The Construction Industry Scheme (CIS)?
The CIS has been a huge headache for many construction businesses, with admin work directly affecting valuable time and resources. As well as this, a measure was introduced to tackle the fraudulent activity of businesses and subcontractors who unfairly break CIS rules.
The policy measure came into effect on 6th April 2021 and sets out four key changes to CIS rules:
CIS set-off amendment power – Allows HMRC to amend CIS deduction amounts claimed by sub-contractors on their Real Time Information (RTI) Employer Payment Summary (EPS) returns. This will be used to correct errors or omissions relating to the claims, to remove claims, and to prevent certain employers from making further similar claims where no evidence or eligibility of the sums deducted are provided.
Cost of materials – Makes it clear that it is only where a sub-contractor directly incurs the cost of materials purchased to fulfil a construction contract, that the cost in question is not subject to deduction under the CIS.
Deemed contractors – Changes the rules for determining which entities operating outside the construction sector need to operate the CIS (‘deemed contractors’). Rather than looking back at each year end to determine the level of construction expenditure these businesses will need to monitor that expenditure more regularly and apply the CIS when construction expenditure exceeds £3 million within the previous 12 months.
CIS registration penalty – Expands the scope of the penalty for supplying false information when applying for gross payment status (GPS) or payment under deduction within the CIS. Individuals and companies will now be liable to a penalty if they are in a position to exercise influence or control over the person making the application, or where they themselves make a false statement or supply a false document for the purpose of enabling another person to register for GPS or payment under deduction.
These amendments are aimed to level the playing field in the construction industry and stifle fraudulent activity, which naturally affects the taxpayer, from occurring. You can find how to register for CIS here.
We hope this has outlined to you exactly what the Construction Industry Scheme (CIS) is and whether it applies to you or your business. If you require any further information on HMRC schemes, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.