The construction industry scheme (CIS) is a tax deduction scheme put in place by HMRC to tackle tax avoidance in the construction industry. Contractors must register under CIS. Subcontractors do not have to register, but failing to register for CIS has consequences.
If you carry out work as a non-registered subcontractor, your CIS deductions will be made at a rate of 30% rather than the standard rate of 20%. Contractors face penalties and fines if they fail to submit their CIS returns by the filing date.
You can register for CIS as a contractor or subcontractor (or both) regardless of whether you operate as a limited company, partnership, or sole trader. You do not need to register if you are an employee.
What is the point of registering under the construction industry scheme?
If you pay subcontractors to do construction work, you must register as a CIS contractor. You will then need to make CIS deductions from your subcontractors’ gross pay.
If you are a self-employed subcontractor who is hired by contractors to carry out work, you should register under CIS. Failing to register will mean CIS deductions are made from your pay at a higher rate of 30%. And that’s if a contractor agrees to work with you – some contractors will not work with subcontractors who are not registered for CIS.
Who needs to register for the CIS scheme?
If you are a construction business and you pay subcontractors for construction work, you’re classed as a ‘mainstream’ contractor. If you are not a construction business but you have spent more than £3 million on construction in 12 months, you count as a ‘deemed’ contractor.
Mainstream and deemed contractors must register under CIS.
Subcontractors who carry out work for contractors should also register for CIS. Although it is not a legal requirement, it is beneficial as your CIS deduction rate will be lower.
You do not need to register under CIS if you are an employee or if you are a self-employed contractor who only carries out work for private householders. This is because a private householder paying you for work does not need to deduct CIS. You will still need to record this income on your annual tax return so your tax liabilities are calculated correctly.
Is CIS registration compulsory?
Contractors must register for CIS. Failure to register means they will be unable to make payment to subcontractors correctly which will result in fines and penalties.
CIS registration is not compulsory for subcontractors, but there are benefits to registering. Regardless of whether you are registered or not, you will still have to complete tax returns and pay tax on your income. Failure to pay the correct taxes can result in big penalties.
What happens when you don’t register for CIS?
Back in the 1970s, most contractors paid subbies in cash and a lot of these payments weren’t being recorded for tax purposes. The construction industry scheme was introduced to create a better paper trail. These days, subcontractors have ‘tax’ deductions made from their pay in the form of CIS.
CIS deductions are not the same as the income tax deductions made under PAYE. However, the idea is that the money collected from CIS deductions will be used against a subcontractor’s tax and national insurance liabilities when they complete their tax returns.
The rate of deduction will depend on whether the subcontractor is registered under CIS and their CIS status. You do not need to make deductions when a subcontractor has gross payment status.
As a contractor, you must make deductions before you pay your subcontractors and then pay them to HMRC. You must also file CIS returns and keep CIS records. Keeping CIS records is important as if HMRC ever query anything, you can refer back to these records.
Failure to complete your monthly return on time will result in fixed penalties.
What are CIS deductions?
There are three rates of CIS.
The standard rate is 20%. This is for subcontractors who have registered for CIS.
The higher rate is 30%. If a subcontractor is not registered under CIS, this higher rate will apply.
The third rate is 0%. This applies to subcontractors who have gross payment status. To qualify for CIS gross payment status, the subcontractor must pass a compliance test and turnover test.
Before you can pay new subcontractors, you’ll need to ‘verify’ them with HMRC. HMRC will tell you whether they’re registered for CIS and what rate of deduction to use.
You can find out more about verifying subbies in our article: What do I do if I can’t verify a subcontractor?
Fines and penalties
If you are making CIS deductions, you must file monthly returns with HMRC. A late return or missed return will result in CIS penalties.
If your monthly return is one day late, you will be charged a fixed penalty of £100. If the return is two months late, you will receive an additional penalty. Further penalties will be applied after six and twelve months.
HMRC will charge a ‘higher’ penalty if they find out you deliberately withheld information.
You do not have to file a return for months when no payments are made to subcontractors, but you must notify HMRC when no return is due to avoid CIS penalties.
If you need to make changes to a monthly return, you should notify HMRC.
Keep your subbies on the right side of HMRC with HardHats
CIS payments are not the only thing HMRC are concerned with. They don’t like it when contractors try to disguise employees as subcontractors working on a self-employed basis.
But it’s unlikely they will open an enquiry into the employment status of your subbies out of the blue. All too often, these enquiries stem from a tax or CIS query.
And if HMRC decides your subbies are actually employees, you will be held liable for any unpaid tax or NIC.
The best way to protect yourself from confusion around the employment status of your subbies is to get a bespoke subcontractor agreement in place.
This is where HardHats comes in.
We specialise in helping construction firms work with subcontractors long-term without using a payroll company and without upsetting HMRC.
You tell us how you work with your subcontractors, we put together insurance-backed contracts for you, and you get peace of mind that you’re protected. We even do the hard work of getting them signed (all done electronically) so you don’t have to lift a finger.
If HMRC ever reclassifies your subcontractors as employees, we pay any PAYE, NI, interest and penalties.
Book a call with us to get started.