Do I Need to Register for CIS?

The Construction Industry Scheme, usually known as CIS, is a system under which contractors make deductions from certain payments to subcontractors and pass those deductions to HMRC.

The deductions are advance payments towards the subcontractor’s tax liabilities.

CIS can apply to sole traders, partnerships and limited companies, and it is important to understand whether you are acting as a contractor, a subcontractor, or both.

A business can sometimes be both a contractor and a subcontractor at the same time.

Do contractors have to register for CIS?

Generally, yes.

You normally need to register as a CIS contractor if you pay subcontractors to carry out construction work.

This can include a construction business that engages other businesses or self-employed workers to complete part of a construction project.

However, CIS is not restricted to businesses whose main trade is construction.

A business that does not ordinarily carry out construction work can also become a contractor for CIS purposes if it meets the rules for a deemed contractor.

We explain this later in the guide.

Do subcontractors have to register for CIS?

A subcontractor is broadly a business that carries out construction work for a contractor.

This could be:

• A sole trader
• A partnership
• A limited company

Subcontractors are not legally required to register for CIS in the same way that contractors are.

However, registration normally affects the rate of CIS deduction.

A registered subcontractor who is successfully verified will normally have CIS deducted at 20%.

If the subcontractor is not registered or cannot be successfully verified, deductions will normally be made at 30%.

A subcontractor with gross payment status can normally be paid without CIS deductions.

Important

Not registering as a CIS subcontractor does not mean CIS is avoided. In most cases it means the contractor will have to deduct CIS at the higher 30% rate.

Can CIS apply if I’m not a builder?

Yes.

CIS covers a wide range of construction operations and is not determined simply by whether somebody describes themselves as a builder.

Depending on the work being carried out, CIS can potentially apply to activities involving:

• Building work
• Alterations
• Repairs
• Decorating
• Demolition
• Site preparation
• Installation of certain systems
• Other construction operations

However, some work connected with the construction industry falls outside CIS.

Examples HMRC gives of work that is generally excluded include:

• Architecture and surveying
• Scaffolding hire where no labour is provided
• Carpet fitting
• Delivering materials
• Certain non-construction services on a construction site, such as running a canteen

Whether CIS applies should therefore be based on the actual work being performed rather than simply the job title or industry description.

Contractor or employee: why employment status still matters

CIS only applies where the worker or business is genuinely operating as a subcontractor.

Before treating an individual as a CIS subcontractor, a contractor still needs to consider whether the person should actually be treated as an employee.

Registering or verifying somebody under CIS does not determine their employment status.

Important

CIS registration does not make somebody self-employed. A contractor still needs to consider the employment status of the person carrying out the work. If they should be treated as an employee, PAYE may apply instead.

How do I verify a subcontractor?

Before paying a new subcontractor, a CIS contractor normally needs to verify them with HMRC.

Verification allows HMRC to confirm:

• Whether the subcontractor is registered for CIS
• The rate of deduction the contractor should use
• Whether the subcontractor has gross payment status

Contractors may also need to verify a subcontractor they have used before if that subcontractor has not been included on a CIS return in the current or previous two tax years.

The subcontractor’s details need to match HMRC’s records.

Depending on the type of subcontractor, information required can include their:

• Unique Taxpayer Reference
• National Insurance number
• Company registration number
• Business or trading name

Why are CIS deductions 20%, 30% or 0%?

HMRC tells the contractor which treatment to apply when the subcontractor is verified.

CIS deductions are not necessarily calculated on the full amount shown at the bottom of the subcontractor’s invoice.

What part of an invoice is CIS deducted from?

The CIS deduction is calculated after removing certain amounts from the gross payment.

Broadly, the contractor starts with the subcontractor’s gross invoice and removes qualifying amounts such as:

• VAT
• Materials that the subcontractor has paid for directly
• Qualifying plant hire for the job
• Certain consumable stores
• Certain fuel costs other than fuel used for travelling
• Certain costs of manufacturing or prefabricating materials

The appropriate CIS percentage is then applied to the remaining amount.

The contractor may ask the subcontractor for evidence of material costs.

Example

A registered subcontractor who has been verified at 20% submits an invoice containing:

• Labour: £2,000
• Materials paid for directly by the subcontractor: £500
• VAT: £500
• Total invoice: £3,000

Assuming the £500 materials qualify to be excluded from the CIS calculation, the CIS deduction is calculated on the £2,000 labour element rather than the £3,000 invoice total.

20% of £2,000 = £400 CIS deduction.

The contractor would therefore pay £2,600 to the subcontractor and account for the £400 CIS deduction to HMRC.

This is a simplified example. The correct amount on which CIS is deducted depends on the actual invoice and costs.

What is gross payment status?

Gross payment status allows a qualifying subcontractor to receive payments from contractors without CIS deductions being taken.

The subcontractor remains responsible for paying its own tax liabilities.

To qualify, HMRC applies conditions including:

• A compliance test
• Carrying out construction work or providing construction labour in the UK
• Operating the business through a bank account
• Meeting the relevant turnover test

For the current rules, the turnover test is generally based on turnover excluding VAT and materials.

HMRC currently states that the minimum turnover is generally:

• £30,000 for a sole trader
• £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
• £30,000 for each director of a company, or at least £100,000 for the whole company

There are additional rules for closely controlled companies.

Gross payment status can help cash flow, but the subcontractor still needs to set aside enough money for its own tax liabilities.

When are monthly CIS returns due?

CIS contractors need to report relevant payments to subcontractors on monthly CIS returns.

CIS tax months run from the 6th of one month to the 5th of the next.

The monthly return is due to HMRC by the 19th following the end of the tax month.

Payments made from 6 May to 5 June are included on the CIS return due by 19 June.

The return reports relevant payments made to subcontractors and CIS deductions made.

What if I haven’t paid any subcontractors?

If a contractor has not made any payments to subcontractors for a CIS tax month, HMRC should be told where required.

This can involve submitting a nil return.

If the contractor knows it will not be paying subcontractors for a period of up to 6 months, it can ask HMRC to make the CIS scheme inactive for that period.

The contractor must resume filing when it starts paying subcontractors again.

When do I pay CIS deductions to HMRC?

The deadline for filing the CIS return and the deadline for paying deductions to HMRC are not exactly the same.

CIS deductions are generally paid to HMRC alongside the contractor’s PAYE liabilities.

Payment is normally due:

• By the 22nd where paying electronically
• By the 19th where paying by post

The payment timing can depend on the contractor’s PAYE payment arrangements, so check which timetable applies to your business.

What is a payment and deduction statement?

Where CIS deductions are made, the contractor must provide the subcontractor with a payment and deduction statement.

The statement should show information including the payments made and CIS deducted.

It must normally be provided within 14 days of the end of the relevant CIS tax month.

For example, for the tax month ending 5 June, the statement should normally be provided by 19 June.

Subcontractors should keep these statements because they provide important evidence when claiming credit for CIS deductions.

Is CIS an extra 20% tax?

No.

CIS deductions are advance payments towards the subcontractor’s tax liabilities.

They are not simply an additional 20% tax on top of the subcontractor’s normal tax bill.

How the deductions are ultimately dealt with depends partly on whether the subcontractor is a sole trader, partnership or limited company.

How do sole traders claim CIS deductions?

A sole trader reports their construction income through Self Assessment in the normal way.

They should report their income before CIS deductions and separately report the CIS deductions suffered.

HMRC then takes the deductions into account when calculating the person’s Self Assessment position.

Depending on the overall tax position, this can reduce the amount still payable or potentially result in a repayment.

For more on your reporting obligations, read Do I Need to Complete a Self Assessment Tax Return?.

How do limited companies claim CIS deductions?

The treatment is different for limited companies.

Where a limited company suffers CIS deductions as a subcontractor, it normally reports the year-to-date deductions through its PAYE scheme using an Employer Payment Summary, or EPS.

The company sends its Full Payment Submission as usual and reports the total CIS deductions suffered for the tax year to date on the EPS.

HMRC can then set those CIS deductions against relevant amounts the company owes through its PAYE scheme.

These can include relevant PAYE, National Insurance and CIS liabilities.

If the CIS deductions suffered exceed the amount available to offset in a particular month or quarter, the excess can generally be carried forward against relevant liabilities later in the same tax year.

If CIS deductions remain unused after the end of the tax year, the company can make a claim to HMRC.

HMRC’s current process allows qualifying companies to claim a repayment after the tax year has ended. HMRC may first use the amount against overdue PAYE or Corporation Tax liabilities. Any remaining amount can potentially be refunded or, where permitted, used against VAT or upcoming Corporation Tax liabilities.

Important

A limited company should not simply enter CIS deductions suffered on its Corporation Tax return to reduce the Corporation Tax bill. CIS suffered by a company is normally dealt with through the company’s PAYE scheme using an Employer Payment Summary, with any remaining amount dealt with through HMRC’s CIS repayment process.

Accurate payment and deduction statements are particularly important because HMRC can ask for evidence if the CIS deductions claimed by the company do not agree with information reported by its contractors.

Can a business be both a contractor and a subcontractor?

Yes.

This is common in construction.

For example, a limited company may carry out work for a larger contractor and suffer CIS deductions from its own income, while also engaging subcontractors and making CIS deductions from payments it makes to them.

The company can therefore have responsibilities on both sides of the scheme.

This makes accurate bookkeeping particularly important because CIS deducted from subcontractors and CIS suffered from contractors are different amounts and need to be recorded correctly.

What is a deemed contractor?

A business does not necessarily need to be a construction business to become a CIS contractor.

A business whose main activity is not construction can become a deemed contractor if its expenditure on construction operations exceeds the relevant threshold.

HMRC currently states that a business should register as a contractor where it does not carry out construction work itself but has spent more than £3 million on construction in the 12 months since making its first payment.

There are detailed rules around the calculation and exclusions, including circumstances involving work on property used for the business itself.

Businesses approaching this level of construction expenditure should check their position based on their particular circumstances.

What happens if I file a CIS return late?

HMRC can charge penalties where monthly CIS returns are filed late.

Current late-filing penalties start at £100 when a return is one day late and can increase where the return remains outstanding.

More substantial penalties can arise where returns remain outstanding for longer periods or where HMRC considers there has been deliberate non-compliance.

The important point is that CIS returns should still be dealt with promptly even where the contractor believes there is little or no CIS to pay.

Common CIS mistakes

Common mistakes to avoid include:

• Assuming CIS only applies to builders
• Treating somebody as self-employed solely because they are CIS registered
• Failing to verify a new subcontractor
• Using 20% automatically without following HMRC’s verification result
• Deducting CIS from the full invoice including VAT
• Deducting CIS incorrectly from qualifying materials
• Missing the monthly return deadline
• Failing to provide payment and deduction statements
• Treating CIS suffered as a business expense
• A limited company trying to claim CIS suffered through its Corporation Tax return instead of following the PAYE/EPS process
• Poor records of materials and subcontractor payments

How can Baldwin’s Accountancy Services help?

We can help contractors and subcontractors understand their CIS responsibilities and deal with the ongoing administration of the scheme.

Depending on what is required, this can include:

• CIS contractor registration
• Subcontractor registration
• Subcontractor verification
• Calculating CIS deductions
• Preparing and submitting monthly CIS returns
• Preparing payment and deduction statements
• Recording CIS suffered
• Helping limited companies report CIS suffered through payroll
• Dealing with CIS alongside bookkeeping, payroll and year-end accounts