What is the Construction Industry Scheme (CIS)?
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As a contractor or subcontractor, you’ll be affected by the Construction Industry Scheme (CIS) as part of many of your jobs. You need to know what the Construction Industry Scheme is and what it means for you.
So keep reading.
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) has been in place for many years and is designed to make payments from contractors to subcontractors accountable.
CIS is a scheme that allows for tax on a subcontractor’s pay to be taken ‘at source’ (which means taxed right away) by a contractor and sent to HMRC. Similar to a full-time employee on PAYE.
Under the CIS, contractors are required to make deductions from cash-in-hand payments to subcontractors in order to pay tax and National Insurance to the HMRC.
What is the purpose of CIS?
The scheme was introduced to prevent unaccounted for payments to subcontractors and keep a clear record of earnings for tax purposes. This avoids subcontracts being paid cash in hand and not paying the right amount to HMRC.
CIS for contractors
If you’re making deductions from your subcontractors you need to register with HMRC.
CIS doesn’t apply to payments made to employees who pay tax using HMRC’s Pay As You Earn (PAYE) system.
CIS for subcontractors
As a subcontractor, your tax deductions will be made from your income. If you’re not registered to the CIS then you might be getting taxed at a higher rate.
Is CIS compulsory?
As a contractor who hires subcontractors, following the CIS is compulsory. It’s your responsibility under UK law and there are penalties for anyone who doesn’t properly adhere to the scheme.
Alternatively, if you’re a subcontractor, you’re not responsible for enacting the CIS scheme.
How is CIS calculated?
It’s important that the amount of tax to be paid to the HMRC is correctly determined. So, how is CIS calculated? Firstly, it should be worked out by the contractor not the subcontractor.
To properly calculate CIS, the contractor needs to look at the gross amount of a subcontractor’s invoice, minus any qualifying materials the subcontractor paid for. Tax is then deducted at the CIS tax rate, giving a final figure.
If you’d like to learn more about CIS tax, skip ahead to our ‘what is CIS tax?’ section.
CIS exempt activities
If you work in one of the following fields, these are classed as CIS exempt activities, and you aren’t required to adhere to the scheme:
- Scaffolding hire
- Carpet fitting
- Architecture
- Surveying
- Material delivery
- Any work on a construction site that isn’t classed as construction
In addition to the above job roles, there are also other ways you may be exempt from the Construction Industry Scheme. To learn more, please visit the gov.uk website.
Failure to deduct CIS tax penalties
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 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
FAQs
What does CIS tax stand for?
Ever wondered what CIS tax stands for? It’s the tax that is deducted from a subcontractor’s earnings under the Construction Industry Scheme.
What are CIS deductions?
Many workers are unsure what CIS deductions are, but put simply, this refers to the amount subtracted from a subcontractor’s wages under the Construction Industry Scheme.
What is CIS tax?
Now you know what CIS tax is, as a contractor, you’ll need to know how to apply this to any subcontractor invoices you receive. In fact, the CIS tax that is deducted from a subcontractor’s wages will vary depending on which of the below categories the subcontractor falls into:
- 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%.
What is a CIS number?
Don’t worry if you’re unsure what a CIS number is. Once registered under the Construction Industry Scheme you will be allocated a unique CIS number.
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 that they have collected from customers.
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.
Where can I find answers for other queries?
If you’re just starting out in the construction industry or are looking for further support, joining Checkatrade is a great way to become part of a large community. 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.
Useful 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’re penalties in place for anyone not fulfilling their responsibilities under the CIS.
- There’re certain activities that are exempt under the CIS.
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