CIS – Construction Industry Scheme

In these two videos Nick, a chartered Management Accountants describes how CIS works for subcontractors for Sole Traders and for Limited Companies.

By the way if you’ve never set up a limited company then you are automatically classed as a sole trader.

The construction industry scheme (CIS). Contractors must make deductions from subcontractor’s payments. These deductions are then passed onto HM Revenue and Customs (HMRC).

The deductions are advance payments towards the subcontractor’s tax and National Insurance.

If you are a contractor, then you must register for the scheme. Subcontractors are not required to register however the deductions will be taken at a higher rate.

You must register as a contactor if either you pay subcontractors for construction work or your business doesn’t do construction work, but you spend an average of more than £1 million a year on construction in any 3-year period.

Types of work which is covered by CIS

  • Site preparation
  • Alterations
  • Dismantling
  • Construction
  • Repairs
  • Decorating
  • Demolition
  • Installing systems for heating, lighting, power, water and ventilation
  • Cleaning the inside of buildings after construction work

Exceptions

You are not required to register for CIS if you only do the following jobs

  • Architecture and surveying
  • Scaffolding hire (no labour)
  • Carpet fitting
  • Delivering materials
  • Making materials used in construction including plant and machinery
  • Work on construction sites which are not clearly construction e.g., running a canteen or site facilities

Before a contractor can make a payment to a subcontractor, they must verify with HMRC that the subcontractor is registered.

HMRC will inform you of the deduction rate if no deduction is required the contractor can make the payment to the subcontractor in full

If a deduction is required, then the following must occur:

  • Calculate the deduction
  • Make the deduction
  • Record details of the payment, materials and deduction
  • Make the net payment to the subcontractor
  • Complete and give the appropriate statement of deduction to the subcontractor

Each month, contractors must send HMRC a complete return of all the payments which they have made or tell them that they have made no payments. Returns need to include:

  • Details of the subcontractors
  • Details of the payments made, and any deductions withheld
  • A declaration that the employment status of all subcontractors has been considered
  • A declaration that all subcontractors that need to be verified have been verified.