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What is the Construction Industry Scheme (CIS)?

Working in the construction industry is far more complex than you might think. And if you’re a contractor or subcontractor, in particular, then you’ll need to know what the Construction Industry Scheme is for tax purposes.

What is the Construction Industry Scheme?

While building and construction can seem a clear-cut industry, there are plenty of government regulations you should be aware of. This includes what’s known as the Construction Industry Scheme.

The Construction Industry Scheme (CIS) has been in place for many years. It’s designed to make payments from contractors to subcontractors accountable for tax purposes directly from the source.

This means that tax can be taken right away, rather than days or weeks down the line.

Essentially, this allows a contractor to be taxed and paid in a similar manner to a full-time employee on PAYE. In other words, it makes it easier for everyone to see what their take-home pay will be.

A surveyor in PPE flying a drone over a construction site

What is the main purpose of the Construction Industry Scheme?

The Construction Industry Scheme was specifically introduced to prevent payments to subcontractors that weren’t accounted for. This in turn makes it easier to keep a clear record of earnings for tax purposes.

Moreover, it prevents subcontracts from being paid cash-in-hand, which can make paying the correct amount of tax to HMRC difficult.

What work is covered by CIS

The Construction Industry scheme covers a variety of construction and building work, including all of the following:

  • Permanent or temporary buildings
  • Civil engineering
  • Site preparation
  • Demolition work
  • Site installations

There are, of course, plenty of other areas the CIS covers, and you should visit the government website for more information.

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How to calculate CIS?

It goes without saying that the amount of tax you pay to HMRC needs to correct to avoid legal penalties. This makes learning how to calculate CIS tax properly very important.

But how exactly is CIS calculated?

Well, first and foremost, if you’re a contractor, you first need to take the gross amount of your subcontractor’s invoice. You then deduct any qualifying materials that the subcontractor paid for, followed by a tax deduction based on the CIS tax rate.

Once this is done, the subcontractor will have their final payment figure and does not need to worry about tax.

And remember, if you’re a subcontractor, you don’t need to worry about calculating CIS tax. CIS tax is purely handled by contractors.

contractor and homeowner shaking hands over a written contract

What are CIS deductions for tax?

CIS deductions are the amount of money removed from a subcontractor’s wage. These deductions are calculated as flat percentages, determined by the government.

Based on the information above, if you’re a contractor, then you need to know what these rates are. That way, you can apply them to any subcontractor invoices you receive.

However, there are multiple CIS tax rates to be aware of. Thus, the tax deducted from a subcontractor can vary based on the following:

  • If the subcontractor is registered under the CIS, their tax will be set at 20% of their earnings
  • If the subcontractor is not registered under the CIS, their tax will be set at 30% of their earnings
  • If the subcontractor has gross payment status, which can be applied for when they register with the CIS, then their tax deductions will be 0%

So, if you’re a subcontractor, be sure to inform your contractor what CIS tax band you fall into.

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Is the CIS compulsory?

Unless specified by your particular industry, if you hire subcontractors, then the CIS is compulsory.

It’s your responsibility under UK law to meet your tax obligations. If you don’t, there are numerous penalties that can be applied to your business.

Who is exempt from the CIS scheme?

While CIS is considered to be compulsory, there are certain industry fields that qualify for CIS exemptions. These include:

  • Scaffolding hire
  • Carpet fitting
  • Architecture
  • Surveying
  • Material delivery
  • Any work on a construction site that isn’t classed directly as construction

In addition to the above job roles, there are also several other factors that can qualify you for CIS exemptions. Again, these can be found on the government website.

Construction accountant

What happens if I fail to make my CIS deductions?

As the Construction Industry Scheme isn’t voluntary, all contractors are expected to enrol and submit payments on time.

This means there are penalties for failure to deduct CIS tax that will vary, depending on how late the payment is.

Below are a few of the main penalties for any contractor who fails to fulfil their responsibilities under the scheme on time:

  • One day late – £100
  • Two months late – £200
  • Six to twelve months late – either £300 or 5% of the payment due, depending on which is higher
  • Over twelve months late – either £3,000 or the entire amount of the payment due, depending on which is higher

As you can see, failure to pay CIS tax on time has the potential to heavily impact your bottom line.

Where can I find answers to other construction queries?

Now that you know what the Construction Industry Scheme is, you should have an easier time running or starting your construction business.

And if you’re just starting out in the construction industry and need support, then joining Checkatrade is a great way to get this.

As a member, you’ll have access to our forum, where you can connect with other tradespeople and ask any burning questions.

Plus, you can access a range of other benefits to kick-start your business.

We also have plenty of guides on-site, including information on how to start a building business, builder’s insurance, scaffolding training and scaffolding health and safety.

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Our checklist for the Construction Industry Scheme

  • The Construction Industry Scheme is in place to ensure the right amount of tax is paid to HMRC from subcontractor’s wages
  • It’s the responsibility of main contractors to calculate and deduct the appropriate amount from any subcontractors they hire
  • There are penalties in place for anyone not fulfilling their responsibilities under the CIS
  • There are certain activities that are exempt under the CIS.

CIS FAQs

What is a CIS number?

A CIS number is a unique number given to every contractor once they sign up for the Construction Industry Scheme. You’ll need to make a note of this so that you can provide it if asked.

Where can I find a CIS tax calculator?

When calculating the amount of tax to collect from your subcontractors, you’ll need to ensure your figures are accurate and up to date. An easy way of doing this is to use an online calculator.

If you’re wondering where to find a CIS tax calculator, a great tool can be found on Patterson Hall Accountant’s website.

What is the VAT reverse charge for building and construction services?

As of 1st March 2021, the VAT Reverse Charge for Building and Construction Services came into play.

This scheme is designed to prevent building and construction service providers from not paying enough VAT.

If you’d like to explore this topic in more detail, our VAT Reverse Charge Building and Construction Services guide is full of handy information.

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