The Construction Industry Scheme (CIS) aims to streamline taxation resulting from the working relationship between contractors and subcontractors.
By having a clear understanding of CIS tax deductions, you can save yourself penalties worth £100-£3000 due to non-compliance.
In this guide, we explain the Construction Industry Scheme and answer frequently asked questions about its implementation and benefits for the construction sector.
The Construction Industry Scheme requires contractors to deduct tax at source from the payments made to self-employed companies or subcontractors for their construction services.
Contractors must pay the tax deducted to the HMRC by the 22nd of every month in accordance with the subcontractor's tax status - that is, 20% of the gross payment for registered subcontractors and 30% for non-registered subcontractors.
Subcontractors can reclaim CIS refunds with their National Insurance contributions and their year-end tax deductions.
Read this article if you want construction software to help with CIS and other accounting processes.
The Construction Industry Scheme helps stop tax avoidance and makes it easy for self-employed subcontractors to pay their income tax on time.
For this, they leveraged their clients ( the contractors) by placing an obligation on them to carry out the tax deductions.
CIS scheme results in subcontractors paying advance tax and National Insurance for the tax year.
Any non-compliance leads to penalties for both a contractor and subcontractor.
CIS covers all kinds of businesses in the construction industry across limited companies, self-employed individuals, sole traders, and partnerships.
Who is considered a contractor?
You are a contractor if:
Construction activities by private residents are not considered under the CIS tax.
Furthermore, a contractor can be a deemed contractor or a mainstream contractor.
Mainstream contractors include property developers, foreign businesses that undertake construction activities within the UK or gang leaders who organise construction labour for any construction project.
Deemed contractors include non-construction businesses that undertake construction work like oil companies, housing associations, public offices, government development corporations, etc.
It is mandatory for contractors to register under the Construction Industry Scheme.
Check out this essential guide to accounting in construction.
A subcontractor is a business, agency, or self-employed individual that works on a construction project with contractors.
On successful delivery, they receive payment outside the PAYE scheme.
Registering for the CIS is optional for a subcontractor.
On registration, a contractor must deduct 20% tax on the payment, while non-registered ones face a tax deduction of 30%.
Also, public bodies and local authorities who are subcontractors need not apply for registration. Instead, they are registered for gross payment status.
Sometimes, a business is undertaking subcontracting activities, such as civil engineering work, while also working as a subcontractor for other construction businesses.
In this case, you must follow compliance and taxation procedures separately as a contractor and a subcontractor.
The contractor scheme is concerned with construction work carried out within defined UK territories.
This is irrespective of the nationality of both a contractor and subcontractor, payment location, or mode of payment.
However, a subcontractor has to register with HMRC before starting the construction work within UK territories.
For this, a company, whether they are hiring subcontractors in the UK or taking up construction work as subcontractors, must register with the Specialist Personal Tax office.
Learn more about how companies with various employment statuses can register with CIS.
You can also contact HMRC to raise your corporation tax enquiries and get the necessary guidance.
The CIS scheme applies to every activity undertaken by the construction industry in the United Kingdom and its offshore territorial waters up to a limit of 12 miles.
This is applicable irrespective of whether the business is UK-based or not. However, any construction operations or civil engineering work carried out outside the UK is not accountable to this scheme.
Broadly, this scheme applies to the following construction expenses carried out on any property:
The following construction services and works carried out on permanent or temporary structures are eligible under the CIS tax scheme:
Certain jobs not considered construction operations are as follows:
Any construction work carried out on nursing homes, charity organisations, warehouses, education authorities, own offices or leased property is exempted from the scheme.
Deemed contractors are exempt from the scheme for small construction operations or contracts that cost less than £1000, excluding the cost of materials incurred.
Here's the procedure a contractor must follow under the Construction Industry Scheme (CIS):
Entities that identify as a contractor must register with Her Majesty's Revenue and Customs (HMRC) as an employer. This registration process should be completed before paying subcontractors.
You will require a Government Gateway User ID, password, National Insurance Number, business name, and UTR for the employer registration.
In about 15 working days, you will receive the employer PAYE reference number.
Here's the link to register online as an employer based on your business status:
Know your hired subcontractors' details to gain clarity on their employment status - are they employed by an agency, an independent business, or self-employed?
Knowing employment status is necessary because the CIS tax is applicable for labour that identifies itself as a subcontractor. If they are employees, then you have to define payroll to deduct PAYE and National Insurance Contributions.
Is your subcontractor registered with HMRC?
Ensure you keep the following details as a contractor available to you:
You need to keep the following subcontractors' details ready as per their employment status:
You have to consult HMRC to confirm your subcontractor's tax status. HMRC will let you know if your subcontractor has gross payment status or net payments.
They will also provide you with a verification number and rate to deduct tax on future payments.
Doing this is necessary, especially when you are engaging in a construction contract with the subcontractor for the first time.
Once you obtain the verification number and tax rate, you can continue with future payments without repeat verification - provided you included the subcontractor in your returns in the current or 2 prior tax years.
If HMRC comes with an 'unmatched' response, it means either the subcontractor has not registered with the sub-contractor scheme or their identification information might be incorrect.
HMRC will inform both a contractor and subcontractor with a 90 days notice about any changes in the payment process as per Gross Payment or with CIS deductions.
Till then, the contractor should continue to pay subcontractors in the same way as per the prior verification status until further notice by HMRC.
HMRC will instruct the contractor on how to pay subcontractors based on the verification and employment status as follows:
A contractor can make their CIS deductions payments like how they make for National insurance contributions or PAYE.
You can learn more about how these payments are done for better understanding - Guide to employers' PAYE
A contractor should deduct the tax from the amount that excludes any material cost payments that the contractor incurs.
Include plant hire costs like cement mixers, scaffolding, cranes, pumps, etc., and fuel required for its operations as material costs.
Contractors can refer to Appendix D of the Construction Industry Scheme explainer to understand how to determine material costs.
Also, the amount on which the deduction is made should include any travel or fuel expenses incurred by the subcontractor.
CIS contractors must file online monthly returns for all payments that are done to subcontractors irrespective of CIS deductions - Monthly returns online service portal
File the returns by the 19th of each month or by 14 days before the tax month end.
For example, if your tax month was from 7 September to 6th October - you must provide your payment statement by 19th October.
A contractor can choose how to submit the payment and deduction statements, but they must include the below-mentioned aspects:
You do not have to file nil returns in the event of no payment to subcontractors
Also, there is no option to file employer annual returns.
Any regular failure to submit payment statements, deduction statements, or paying subcontractors will attract penalties.
This includes reconsideration of the gross payment status of the contractor or subcontractor.
Also, ensure you do not commit errors in your payment submission, as HMRC takes serious action for intent or negligence-based cases.
Frequent negligence-based errors can hamper your gross payment status if you are both a contractor and subcontractor.
You must contact the HRMC (via CIS Helpline) to inform them about any underpayment, advance payments, overpaid tax, or incorrect returns filed for any construction work.
HMRC will help you confirm the next steps to fix the issue.
For approved defaults by HMRC, you can make changes in the CIS online service portal and update your returns accordingly.
You have to select the 'Returns' menu, and then click on the 'Amend Return' option.
Here is the step-by-step procedure a subcontractor must follow under the Construction Industry Scheme (CIS):
Registering with HMRC as a subcontractor means you have to pay 10% less tax deduction for the construction work carried out.
For this, you must clarify your employment status as a subcontractor.
Here's how you can register as a subcontractor based on your employment status:
Find your Unique Taxpayer Reference number.
If you don't have one, then take up self-assessment to get your UTR as a self-employed - Register for self-assessment.
Please note, you require a mandatory Government Gateway User ID and password for taking up the self-assessment - Sign in to Government Gateway.
Within 10 working days, you will receive your UTR number by mail and sooner on the HMRC app. This signs you up for both CIS and self-assessment.
By 5th October at the end of the tax year, you need to register for self-assessment if you are a partner in a partnership firm - Register for self-assessment.
You must have your UTR number available.
Also, ensure you are already registered as a:
You must register online or by post for self-assessment by 5th October 2023 after the end of the tax year, if you need to complete a tax return for April 2022 - April 2023.
You need to use form SA1 for registration.
Then, within 10 working days, you will receive your UTR by mail or on the HMRC app.
As per the Construction Industry Scheme, here's how your tax deduction will take place:
These tax deductions are considered advance payments for your income tax and National Insurance Contributions.
The CIS scheme applies to non-resident subcontractors working in the UK territories.
If you become eligible for gross payments, it means construction businesses pay you the complete amount agreed upon for the construction work without any tax deductions.
This also means that you have to pay your income tax and National Insurance by the end of the tax year.
You can apply to become eligible for gross payments while registering for the Construction Industry Scheme in 3 simple steps:
If you have already registered for the CIS scheme, then you can call the CIS Helpline and fill up the relevant form as per your employment status.
Here are the links to the forms:
To qualify for gross payment status, subcontractors must follow these steps:
HMRC conducts compliance tests on your construction business to determine eligibility for gross payment status.
These tests include:
For the previous 12 months, your construction business must meet the following turnover requirements (excluding VAT):
For partnership firms or limited companies, the total turnover must be at least £100,000 (excluding VAT) for the previous 12 months.
As a subcontractor, you must cooperate with your contractor to ensure error-free verification, tax deduction, and bank account payments.
We have listed the details a contractor will require from you in the Step-3 verification process of the 'What do subcontractors need to do under the CIS?' section.
For calculating the tax deduction amount, the following aspects will NOT be considered:
Completing the verification procedure is essential to ensure correct CIS deductions.
If a contractor is unable to verify you due to incorrect information or incomplete CIS registrations, you will face a 30% deduction.
Your contractor will submit payment statements for the tax month for your construction work.
Using this, your accountant needs to determine any income tax or National Insurance you must pay to HMRC.
Depending on your business type, you need to file the return at the tax year-end as follows:
HMRC expects you to keep records of the payments and CIS refunds made, for which, you can use form CIS132.
For subcontractors with gross payment status, HMRC will perform an annual review of your construction business to check eligibility.
Any non-eligibility is explained by HMRC and can be appealed to by you.
If you undergo any business change in your employment status, add a shareholder, shut down the company, or change your business name or address - you must inform HMRC via the CIS helpline.
Let us understand the CIS deductions under 3 separate conditions:
Example 1: Registered subcontractor supplies only labour and no materials
If the subcontractor is not registered, then the deduction would be 30% at £150.
Payment statement on contractor's tax month return:
Example 2: Registered subcontractor supplies both labour and materials
If the subcontractor is not registered, then the deduction would be 30% at £180.
Payment statement on contractor's tax month return:
Below is a screenshot of an example payment and deduction statement shared on the official guide:
HMRC expects contractors to keep payment statement records.
It accepts both online and scanned payment statements of the original document as long as it is unaltered and legible.
For this, HMRC has the following requirements from contractors with regards to payment submission records:
For each tax month, irrespective of the withholding tax rates or deductions, contractors should pay subcontractors within 14 days of the month's end.
Be mindful of the time it may take you to process payments within key payment statement submission dates.
Not paying on time or the correct amount will result in penalties as discussed in the next section.
HMRC conducts regular contractor record inspections to ensure construction industry contractors are fulfilling their obligations. The inspection procedure is the same as how HMRC inspects employees' PAYE records.
Based on your offence, HMRC will take the following action:
CIS software is available in the market to help with compliance. Software like Archdesk can help you manage your CIS processes.
Although, hiring a specialist can help you stay accountable, organised, and avoid mistakes that result in penalties from HMRC.
You can consider hiring a specialist to manage CIS deductions in the below scenarios:
You can learn more about the CIS tax and access the CIS portal from the Business Tax section of the UK Government website - Business Tax.
HMRC also conducts regular webinars that explain various nuances of the CIS scheme. You can access them here - HMRC webinars.
If you have more questions, then you can contact the CIS Helpline or access their community forum for quick resolutions.
Steady cooperation between contractor and subcontractor is the first step to avoid any penalties or hassle with the HMRC. Make construction work documentation, clean accounting, record maintenance, and timely payments a part of your business workflows for efficient taxation.
A contractor deducts 20% from a registered subcontractor's payments as advance tax to HMRC on your behalf. If a subcontractor is not CIS registered, then they will face a 30% tax deduction instead.
As per HMRC's point 47, IR35 or off-payroll tax rules take precedence over the Construction Industry Scheme (CIS). You must audit construction labour hired and check employment status to determine any obligations under IR35 or CIS.
CIS ensures efficient and timely taxation for subcontractors and contractors carrying out construction operations in the UK territories. Its aim is to prevent any tax fraud or evasion.
Depending on the CIS registration tax status of the subcontractor, a contractor deducts 20% or 30% of the payments and submits them to HMRC as advance tax.
If your subcontractor is VAT registered, then contractors need not account for VAT in their deduction statements.
Learn more about VAT reverse charges from this webinar by HMRC - How to apply the VAT reverse charge for construction services.
If you do not have a UTR number, you have to register for the same, which usually takes 10 working days. You can contact the CIS Helpline to enquire about your application status and seek guidance.
If you paid more tax and national insurance, you can claim online or by post. Your claim should include the company name, address, contact, UTR, PAYE reference numbers, and an estimation of the overpaid amount. You can also choose to deduct the overpaid tax amount with your VAT, Corporation tax, or other liabilities.
If you are managing the subcontractors for the construction work, you need to register as a contractor under CIS. If you are merely connecting the contractor with subcontractors, and are not involved in the construction operations, then you need not register under CIS, but your client contractor needs to.
The CIS tax scheme came into effect in 1971 to ensure the construction industry was not participating in any tax evasion activities.
CIS is calculated only on labour delivered for the construction operations. It excludes any material costs that the subcontractors incur.
Due to this, contractors need to verify the accuracy of material costs to ensure a subcontractor does not inflate their material costs to save CIS tax deductions. Additionally, HMRC may inspect the invoices by asking for relevant bills on construction material expenses.
The CIS scheme does not apply to any construction project that involves homeowners or domestic work. In this case, homeowners will pay subcontractors the complete amount without any deductions.
It is the responsibility of the subcontractor to pay the relevant income tax at the year's end.
You can contact HMRC via the CIS Helpline to enquire about your CIS registration status.
July 3, 2023 • 6 min read
June 14, 2023 • 6 min read
June 14, 2023 • 4 min read
June 6, 2023 • 5 min read