7 ways to avoid Construction Industry Scheme pitfalls
Lenah Oduor

Lenah Oduor

Lenah is a CIPFA qualified accountant with over 18 years’ experience in both business and accounting practice.

7 ways to avoid Construction Industry Scheme pitfalls

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:

A contractor is a business or other concern that pays subcontractors for construction work.

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:

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

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.

The information contained in this website is for general information purposes only. The information is provided by GHawk Accounting and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is, therefore, strictly at your own risk and we accept no liability for action taken upon recommendations made in on this website.

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email

More on the blog