Introduced by the UK Government in 1999, the Construction Industry Scheme launched with something of a shaky start, before a revamp in 2007 brought it in line with modern practices.
Aimed at preventing tax evasion in the industry, the CIS outlines rules for how payments to subcontractors for construction work have to be handled by contractors in the construction industry.
Under the scheme, all payments made from contractors to subcontractors must take account of the subcontractor’s tax status as determined by HM Revenue & Customs. According to the guidelines, contractors deduct 20% in subcontractor CIS payments if the subcontractor registers with the CIS. However, this figure increases to 30% if the subcontractor isn’t registered.
- You pay subcontractors for construction work
- Your business does not do construction work, but you have spent more than £3 million on construction in the 12 months since you made your first payment
To avoid the higher 30% deductions, subcontractors must register if they do construction work for a contractor.
In some cases, it is also entirely possible that smaller businesses can fall into the role of both contractor and subcontractor. If this applies to you, you must register as both with the Government.
These rules are similar to those in Ireland, although it operates under a different name - Relevant Contracts Tax, or 'RCT', for short.
Relevant Contracts Tax (RCT) is a withholding tax mechanism to ensure those involved in construction operations are tax-compliant. The legislation obliges a person (the principal contractor) to retain tax from the amount payable to contractors/subcontractors.
The Finance Act 2011 introduced significant changes to the operation of the RCT system. The new online system became effective from 1 January 2012 and all RCT compliance is now conducted online using the Revenue’s Online Service (ROS).
In short, all construction work carried out in the UK - up to the 12-mile territorial waters limit - is covered by the CIS. The scheme does not apply to construction work done outside the UK. However, a business outside the UK carrying out construction work within the UK must register accordingly with the scheme.
It covers all types of businesses and other concerns in the construction industry, ranging from self-employed people to partnerships or companies.
Examples of work that falls into the CIS are:
- Site preparation
However, it is important to note that you do not have to register if you only do certain jobs, which include:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in construction, including plant and machinery
- Delivering materials
- Work on construction sites that’s clearly not construction - for example, running a canteen or site facilities
Exemptions for the Construction Industry Scheme
Some exceptions mean that certain businesses need not apply to the scheme for the work that they are doing. These may include:
- Work carried out on land owned by a subcontractor receiving payment.
- Payments for construction operations by the governing body, or headteacher of a school, on behalf of the local education authority.
- Works paid for by a charity or a trust.
The Government website provides a detailed breakdown of CIS exemptions.
To start working as a CIS contractor, you have to register as a new employer with HMRC. Once registered as a new employer, HMRC will then set up a Contractor Scheme and, where necessary, a PAYE Scheme for you. You will then be in a position to take on subcontractors - which you will need to verify with HMRC, who can advise you on the level of deductions when it comes to paying them.
An important note is that contractors must inform HMRC about their monthly subcontractor payments by the 19th of each month. Otherwise, they face a penalty which could rise to £3,000.
Whilst not mandatory to register for CIS as a subcontractor, doing so ensures deductions occur at the 20% rate instead of 30%, which is the figure for those who are unregistered. It is also important to note that any CIS deductions contribute towards your tax and National Insurance, affecting your tax liability.
For sole traders - and partners - who declare earnings and pay tax through Self Assessment, record the full invoice amounts as your income, adding CIS deductions in the dedicated section. HMRC will then work out your liability based on these figures and, if you still owe tax after CIS payments, you need to pay it by 31 January.
This page is a brief guide to the scheme and the steps to comply with CIS. For more information about the Construction Industry Scheme, head over to the Government’s website.
Guidance is often changing, with the latest update taking place in April 2021, tackling abuse of the CIS system. You can read more about the 2021 changes to the Construction Industry Scheme and stay up to date by heading to this page.