What is the CIS?
The Construction Industry Scheme (CIS) was brought in by HMRC in 1971 to help minimise evasion in the construction industry, as well as to protect construction workers from being employed illegally and taken advantage of.
The scheme works by contractors taking money from their subcontractor’s wages in order to cover their tax and National Insurance contributions. In order to take part in the CIS, contractors and subcontractors must both be registered for the scheme before the work begins, and the scheme is not available to employees within the construction industry, as they are covered by the Pay As You Earn (PAYE) system.
When does CIS apply?
CIS is applicable to any payments made under a construction contract, between a contractor and a subcontractor, as long as it is not an employment contract. Even if the contract covers something other than construction, the CIS regime will apply to all payments made under that contract. Thus, many contractors find it easier to split the contract so that only payments relating to construction specifically are covered by the CIS scheme.
Contractors who can register for the scheme include property developers and builders, as well as businesses who are not in the construction industry but who have spent more than £1 million on construction operations in the last 3 accounting periods.
The types of work that are considered ‘construction’ for these purposes include:
- Groundwork
- General building (bricklaying, plastering and so on)
- Alterations
- Building repairs
- Building demolition
CIS does not apply to some elements of construction, though, meaning that contractors and subcontractors working in these areas will not be eligible to apply:
- Architectural services
- Surveying
- Carpet fitting
- Delivering building supplies and materials
- People who work on construction sites but are not part of the construction industry (canteen workers etc)
How much is the CIS deduction?
Subcontractors who are registered to the CIS scheme will have 20% tax deducted from their salary. Subcontractors who have not signed up for the scheme are liable to a 30% deduction. For this reason, it makes sense for all subcontractors to sign up to the scheme.
What are the benefits of CIS?
Working as a contractor can offer a lot more freedom when it comes to the work that you take on and the hours that you work, but one of the main drawbacks is that it can be hard to enforce payments on your invoices. CIS guarantees you a regular income and being paid for the work that you have done, and makes it harder for contractors to get out of paying you by going missing.
You will also receive the benefit of your tax and National Insurance being covered outside of the pay that you receive, making it easier for you to complete your tax return at the end of each financial year.
Do I need to be CIS registered?
You do not legally have to sign up for the CIS scheme as a subcontractor, although it makes sense financially to do so to avoid having to pay an extra 10% in tax from your pay.
Another alternative to CIS is applying for gross payment, which is available for subcontractors who have an annual turnover of more than £30,000 and have an excellent history with tax compliance. In this case you will be able to receive the full amount of your payment, and pay any tax on your own at the end of each tax year.
How can a subcontractor apply to receive gross payments?
A subcontractor might be able to receive gross payments (the sum of all of the money they have earned before deductions have been made) from a contractor in some situations. If they wish to do this, they must provide evidence to prove that they pass the following tests.
Business test
All construction work must have been carried out in the UK and the business must be predominantly run through a bank account.
Turnover test
Minimum limits on a subcontractor’s annual turnover exist in order to apply for gross salary. These limits are:
- For an individual – turnover must be at least £30,000 annually from construction work alone
- For a partnership – turnover must exceed either £200,000 or the multiple turnover threshold excluding the cost of materials. The multiple turnover threshold is the sum of each individual in the partnership multiplied by £30,000, plus the amount of the threshold each company in the partnership would obtain if that company were applying on their own.
- For a company – turnover must exceed the lower of £200,000 and the sum of the number of directors multiplied by £30,000.
Compliance test
Businesses must prove that they have complied with all of their tax obligations for the 12 months preceding the date of their application, by supplying evidence of their accounts and any further required information.
HMRC will use these tests to process the application and make a decision based on this as to whether or not a subcontractor is allowed to receive their gross payments from a contractor.
What’s new with CIS?
As of September 2018, any non-resident business engaging in construction matters which were taxed according to the CIS scheme are able to register online as a contractor or subcontractor. Before that, beginning in July 2016, any non-resident trading in, dealing in or developing land in the UK were required to register for either income tax or corporation tax.
As of April 2019, the security deposits’ legal regime for PAYE tax began to take into account CIS deductions, thanks to the Finance Act 2019 which empowers HMRC to force businesses to hand over details of any securities if HMRC believes that this company is a high-risk for non-compliance.
Finally, it has been suggested that as of April 2020, CIS deductions could be considered a secondary preferential creditor if a business becomes insolvent.
More information
CIS has been with us a long time but is still a topic that causes a good degree of confusion as well as having several pitfalls for the unwary in terms of complying with it correctly.
If you need help with this, or any other accountancy matter, then please feel free to get in touch. You can reach us on 01473 744 700 or email us on contactus@aag-accountants.co.uk.
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