Construction Industry Scheme Guide
Whether you’re a tradesperson, or run your own construction business, there is a great deal of government legislation that you’ll need to comply with.
In the past few years, with the introduction of Making Tax Digital and Domestic Reverse Charge, business owners have found themselves needing to change their business models and processes to comply with these changes.
It is vital that you understand your responsibilities within the construction industry, to ensure you do not fall foul of any nasty surprises.
The Construction Industry Scheme requires that tax be deducted at source from payments made by a contractor or subcontractor. These deductions count towards the subcontractor’s tax and National Insurance.
What CIS means for those in the construction industry
If payments are made under a construction contract between a contractor and subcontractor, both parties need to comply with CIS.
Contractors must register with HMRC before taking on their first subcontractor. Subcontractors need to register for CIS and give their contractor their legal business name and Unique Taxpayer Reference. Deductions are usually 20% but could be 30% for unregistered subcontractors (or if the contractor can’t verify the subcontractor with HMRC).
Under CIS, the contractor deducts tax at source on any payments made to the subcontractor (depending on the subcontractor’s registration status).
Contractors and CIS
If you are a contractor, and you pay sub-contractors, you must register with HMRC before you take on your first sub-contractor.
You’ll also need to check if you should take on the subcontractor as an employee instead of sub-contracting the work. This is important as you could face a penalty if you falsely subcontract the work as opposed to employing them.
Once you have confirmed that it is ok to subcontract the work, you’ll need to check with HMRC that you subcontractor is registered with CIS.
Then, when you pay the subcontractor, you’ll need to deduct the right amount of tax and National Insurance from their payments and send this directly to HMRC.
The deduction rates are:
- 20% for registered contractors
- 30% for unregistered contractors
- 0% if the subcontractor has ‘gross payment status’
You will also need to submit monthly returns to maintain compliance and keep CIS records.
Subcontractors & CIS
If you’re a subcontractor, you’ll need to register for CIS. You must ensure that you give your contractor your Unique Taxpayer Reference (UTR) so they can verify you and deduct the right amount of tax and National Insurance before paying you. Deductions will usually be 20%, but could be 30% if you are not registered for CIS or if the contractor cannot verify you with HMRC.
You should only receive monthly statements outlining your payment and any deductions that have been sent directly to HMRC.
It is vital that you double check this statement, as you’re still responsible for paying the correct tax and National Insurance for your business, even if deductions have already been made throughout the year by contractors.
If you’d rather pay all your tax and National Insurance to HMRC at the end of the year yourself, you can apply for gross payment status when registering for CIS.
Gross Payment Status
To qualify for gross payment status, your turnover for the last 12 months (ignoring VAT and the cost of materials) must be £30,000 for a sole trader, £30,000 per each partner in a partnership (or at least £100,000 for the whole partnership), £30,000 for each director of a company (or at least £100,000 for the whole partnership).
For more information check the gov.uk website