What is CIS?
The Construction Industry Scheme (CIS) is a government scheme designed to reduce tax fraud. Under CIS, contractors deduct money from any payments made to subcontractors. They then pass this money on to HMRC as advance payments toward the subcontractor’s income tax and national insurance contributions.
Who is included in the Construction Industry Scheme (CIS)?
Contractors must register for CIS if they pay subcontractors to do construction work. You must also register as a contractor if your business does not do construction work but has spent more than £3 million on construction in the 12 months since you made your first payment.
Contractors registered under the scheme must verify CIS registration or payment status of sub-contractors, make deductions to pay HMRC, submit monthly CIS tax returns and issue monthly CIS statements to sub-contractors.
Subcontractors do not have to register, but if they don’t, the deductions made will be at a higher rate.
Subcontractors can also apply for gross payment status. If they qualify, no CIS deductions are made by contractors.
Why was CIS introduced?
Until the early 1970s, most subcontractor payments were made in cash. Unfortunately, many subcontractors weren’t registered as self-employed and often “forgot” to pay tax on their income.
HMRC (then known as Inland Revenue) decided to combat the problem by introducing the Construction Industry Scheme.
Initially, the scheme involved subcontractors being given vouchers, but criminal groups soon figured out how to forge vouchers. Voucher fraud was so rife that by the 90s, Inland Revenue was losing out on an estimated £50 million a year.
That led to the introduction of CIS cards and the process of contractors deducting tax at the source.