What is CIS?
CIS stands for Construction Industry Scheme, it was introduced by HMRC in the 1970’s to combat tax evasion and avoidance.
Contractors deduct money from subcontractor payments, this is passed on to HMRC and these deductions are held and put towards the subcontractors tax and National Insurance, which is calculated at the end of the tax year.
Contractors and subcontractors can be sole traders, partnerships or limited companies and it is possible to fall under both categories. You do not need to be VAT registered to register for CIS.
What work is subject to CIS?
Most construction work to a permanent or temporary building and civil engineering work fall under the scheme.
- Preparation of the site
- Demolition works
- Building works
- The installation of heat, light, power, water, or ventilation systems
- Erection of scaffolding
- Cleaning of the inside of the building after the construction works are complete
What work is exempt from CIS?
The following work is not subject to CIS and a deduction should not be made from the subcontractor:
- The hire of scaffolding
- Carpet fitting
- Producing and supplying materials used in construction
- Work on a construction site that is clearly not construction ie. running a canteen
- External cleaning of buildings, ie window cleaning.
- Works for the end user (ie domestic households)
Should I be registered for CIS?
As a contractor you need to register if you pay subcontractors to undertake construction work and registration must happen with HMRC before you take on your first subcontractor.
Subcontractors do not have to register, however the CIS deduction from their payments will be higher if they are not registered.
Do you need more advice? Talk to our CIS Accountants.
How is the CIS deduction calculated?
The contractor will “Verify” the subcontractor before making any payments. This process determines the rate of CIS to be deducted. Subcontractors can be verified with HMRC, the contractors need certain details to do this. If the subcontractor is a sole trader then their name (as held by HMRC), UTR Number (Issued by HMRC to the subcontractor) and their National Insurance number are needed to complete the verification. A subcontractor which is part of a partnership needs the above information plus the partnership UTR. A ltd company that subcontracts has their company number and company UTR number used to be verified.
The calculated deduction is taken from the net labour element of the subcontractors invoices, it does not apply to any materials that are charged on the invoice.
How much CIS needs to be deducted?
If the subcontractor is not registered with HMRC the deduction is 30% of their net labour.
However, if the subcontractor is registered the deduction will be either:
- 20% of the net labour cost
- 0% – Known as gross status
Gross status is when the contractor does not make any deductions from your invoice and you are responsible for paying your tax and national insurance at the end of the tax year. This is declared as income in your self assessment (If you are a sole trader) or your corporation tax return (If you own a limited company)
To register for gross status you need to qualify and show that:
- You have paid your tax and national insurance on time
- Your business does construction work in the UK
- You run your business through a bank account
HMRC will also look at your turnover to see if you are above the threshold to qualify:
- £30,000 for a sole trader
- £30,000 for each partner in a partnership or £100,000 for the whole partnership.
- £30,000 for each director or £100,000 for the company as a whole and if five or fewer people run the company the annual turnover must be £30,000 for each of them.
Record keeping and key dates:
As a contractor it is your legal responsibility to ensure that deductions are made from subcontractors correctly and records are kept of these deductions.
Xero has a CIS add on module which automatically calculates CIS deductions, ensuring they are recorded in the correct place and It can also be used to verify subcontractors. The contractor must legally provide all subcontractors with payment and deduction statements 14 days after the end of each tax month. These statements show the gross amount invoiced, the amount of the deduction and what has been paid.
Subcontractors need to keep these records for their Self Assessment or Corporation Tax return. These statements can easily be sent from Xero, so long as an email address for the subcontractor is recorded within the contact in Xero.
A monthly return must be submitted to HMRC that shows all the subcontractors who you have paid, how much has been deducted and if there is a materials/labour split to their payments. The return covers the period of 6th of the month to be 5th of the following month, all payments made to subcontractors within this period are recorded on the monthly return.
The amount of CIS withheld is calculated on a cash basis, not on the date of the invoices. An invoice can be received from a subcontractor but the CIS is not submitted to HMRC until payment has been made. The return and any payment due to HMRC must be submitted to by the 19th of the month.
It is the legal responsibility of the contractor to make CIS deductions where necessary, if a subcontractor does not provide the relevant information then the contractor must attempt to verify them and make the deduction based on the verification status.
Penalties and Fines
Records of gross payments invoiced by subcontractors and any deductions that have been taken from their payments must be kept for at least three years. HMRC can request to inspect CIS records at any time and there is a fine of up to £3,000 if you cannot produce these records.
If the monthly return is not submitted by the deadline, then the fine varies depending on how late the filing takes place:
- 1 day late: £100
- 2 months late: £200
- 6-12 Months late: £300 or 5% of the CIS deductions on the return, whichever is higher.
Returns later than this may attract a penalty of up to £3000 or 100% of the CIS deductions on the return, whichever is higher.
As with all schemes there are certain situations that are more complex and there are areas within CIS that can cause some confusion.
To ensure you are remaining compliant and won’t be subject to any penalties it is always best to speak to a professional for any advice on these subjects.