Tax can be a complicated issue for businesses of all types. Whether you are a sole trader or own a large company and you operate in the construction industry you cannot get away from the Construction Industry Scheme. For contractors and subcontractors who contribute to building the UK’s infrastructure, it’s important to understand what your obligations are under the Construction Industry Scheme.
To help, here’s our simple, easy to read Construction Industry Scheme guide – what it is, who it applies to and how you join it:
What is the Construction Industry Scheme (CIS)?
The HMRC Construction Industry Scheme was first introduced as a tax evasion prevention measure in 1972, and an updated CIS came into effect in 2007.
The key elements of the scheme are:
- If you are a contractor employing a subcontractor, you must deduct the tax for payments and pay them directly to the HMRC.
- These CIS tax payments contribute to the subcontractor’s overall tax and National Insurance bill for the year.
To put it simply, if you are a bricklayer, for example, and you are employed by a construction company to carry out work on a project, your payment for the job will have the tax deducted before it is paid into your bank account.
Who is covered by CIS?
CIS covers both contractors and subcontractors operating in the construction industry within the UK.
This includes sole traders, partnerships and limited companies. Other organisations such as local authorities, housing associations and property developers are also obligated to CIS if they have an annual spend of more than £1 million over 3 years.
The CIS rules only apply to payments made by contractors to subcontractors and not employees who work directly for the contractor.
The type of work covered under CIS includes:
- Demolition and construction.
- Site preparation for a construction project.
- Alterations and dismantling.
- Repairs and decorating.
CIS does not affect construction work carried out beyond the UK in another country. If a non-UK business carries out construction work in the UK, however, they must register for CIS.
Contractor vs Subcontractor: What’s the difference?
Key to CIS is the difference between contractors and subcontractors.
- Contractors pay third parties to carry out work on their behalf.
- Homeowners who are hiring a builder to work on their property are not considered contractors.
- A contract may be formerly written or it can be agreed verbally.
A subcontractor is a sole trader or business carrying out work for a contractor on a construction project. This could be, for example, plumbing, electrical and other building services on a construction site. A subcontractor isn’t just a sole trader. It could be a company or a partnership.
Some business act as both a contractor and subcontractor. If this is the case, the rules for CIS apply depending on whether you are acting as one or the other.
If a contractor is using a third party such as an agency to access tradespeople, the agency is considered as the subcontractor even if they are not carrying out the work themselves.
Who is exempt from CIS Scheme?
CIS doesn’t apply to survey or architecture work, the hire of scaffolding without labour, fitting of carpets or delivering materials to the site. It also doesn’t cover areas such as catering or facilities on site that are not to do with construction.
If you are a contractor, CIS does not apply if:
- You are working on a school and you are paid by a governing body or headteacher who is acting on behalf of an education authority.
- You are being paid by a charity or trust.
- You are working on your own business property (which is not for rent or sale).
If you are working on a subcontractor’s property and that work is valued at less than £1,000 (ex. materials) or if you have a contract that is no higher than £1,000, you can apply for an exemption from CIS through HMRC.
Do I need to register for the Construction Industry Scheme?
If you are a contractor in the construction industry, you must register for CIS.
If you are a subcontractor such as a bricklayer, roofing company, electrician or plumber, you should register for CIS whether you carry out some contracted work occasionally or depend on it for your main income.
What classes as construction work for CIS?
According to the HMRC website, the areas covered by CIS include:
- Buildings and structures
- Works forming part of the land
- Installation of systems
- Internal and external cleaning
- Painting and decorating
- Integral works
- Preparatory works
- Finishing operations
How do I register for the CIS Scheme?
It is relatively simple to join CIS online. If you are a business, you should only do this if you are likely to pay subcontractors and act as a contractor.
Contractors will need to register as an employer and you will need your business UTR, your National Insurance number, VAT registration number (if registered), and your legal business name.
Subcontractors who are operating as sole traders can register for CIS through their Government Gateway ID.
- If you are a limited company, however, you will need to complete the CIS305 form online. You can do that here.
- If you are a partnership, you need to complete the CIS304 form online. You can do that here.
Registering for CIS is relatively easy and should take just a few minutes. Once an individual is registered, the contractor has to verify the subcontractor.
What rates of tax are charged for CIS?
- A subcontractor that is not registered with CIS will be charged a rate of 30%.
- A registered CIS subcontractor will be charged tax at 20%.
- Subcontractors who are eligible to receive gross payments will have no deductions made.
All tax is taken in advance of the subcontractor issuing their tax return for the year and the final amount paid may be adjusted accordingly depending on other revenues.
The HMRC Construction Industry Scheme was created to reduce the risk of tax evasion within the building industry. It ensures that contractors pay the tax burden for subcontractors directly to HMRC rather than leaving it to the subcontractor themselves.