What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a compulsory scheme for contractors in the construction industry. Under the scheme, contractors pass money from the subcontractors payments, to HMRC – as an advance payment towards the subcontractor’s tax and National Insurance contributions. The scheme was established to ensure proper tax compliance within the industry.
For contractors who do not follow the rules, there are financial penalties. If you want to ensure compliance, look out for these potential pitfalls.
1. Not registering for CIS
Firstly, make sure that you are required to register. If you carry out any of the following works, you must register for CIS: site preparation, alterations, dismantling, construction, repairs, decorating and demolition. This scheme applies to companies carrying out work in the UK – whether the company itself is UK based or not. Companies, partnerships and self-employed individuals are all eligible for the scheme.
2. Not verifying subcontractors
Before paying a subcontractor, the contractor must check that the subcontractor is registered. This allows HMRC to inform the contractor of the correct level of deduction that must be made – to avoid over or under reducing the subcontractors rate of pay.
3. Not deducting the payment properly
In order to calculate proper deductions, the contractor must take the subcontractor’s tax status into account. A record of the details of the payment must be made and the subcontractor must receive a statement that reflects this.
4. Not submitting a return
Each month, the contractor must complete a return which details: all subcontractors used, details of all payments made, a declaration that the employment status of the subcontractor has been considered, and a declaration that all subcontractors have been verified.
5. Not paying the deductions to HMRC
It goes without saying that once the monies have been deducted from the subcontractors pay, they must be passed to HMRC. Failure to do so could result in a serious fine.
6. Not deducting payments for mixed labour subcontractors
In some cases, a subcontractor may carry out a mixture of works – some which are within the CIS remit, and some which are not. All labour costs must have a CIS deduction applied, unless operated under individual, separate contracts.
7. Adding employees to the scheme
Employees of a construction company are not under the remit of CIS. An employee is a member of staff who is paid through PAYE. PAYE covers the employees tax responsibilities and, therefore, negates the need for CIS.
What is a contractor?
According to HMRC’s official guidelines on CIS terminology, a contractor is:
Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’”.
What is a subcontractor?
According to HMRC’s official guidelines on CIS terminology, a subcontractor is:
If you are ever confused or concerned about your CIS obligations, it’s best to consult an expert. You can find HMRC’s detailed guidance on CIS on the HMRC website or speak to your accountant about filing appropriate CIS declarations and returns.