The construction industry is the only industry where self-employed contractors are ‘taxed’ at source. This is done under the construction industry scheme (CIS).
CIS was created in an attempt to stop construction companies from disguising employees as subbies so they could pay less tax.
Under the construction industry scheme, the main contractor must deduct CIS from the subcontractor’s pay. This deduction is then passed to HMRC. CIS deductions act as advance payments towards the subcontractor’s tax and National Insurance.
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When does the construction industry scheme (CIS) apply?
Contractors that engage the services of subbies for construction work must register for the construction industry scheme (CIS).
Subcontractors that carry out work for a contractor do not have to register but CIS deductions will be made at a higher rate if they don’t. CIS applies to limited companies and sole trader subbies.
Under CIS rules, the main contractor should deduct CIS from the subcontractor before paying their invoice. If the subcontractor is CIS registered, this deduction will usually be at a rate of 20%. Some subcontractors have gross payment status, meaning they pay CIS at a rate of 0%.
When the subcontractor completes their tax return, the CIS can be used against their tax and NI bill.
What is a ‘deemed contractor’?
You count as a deemed contractor if your business does not do construction work but you have spent more than £3 million on construction in 12 months.
This could apply to:
- housing associations or arm’s length management organisations (ALMOs)
- local authorities
- government departments
If you fall into this category, you should register under the construction industry scheme (CIS) and make CIS deductions as applicable.
What work falls under CIS?
Under the construction industry scheme, construction work includes:
- site preparation (for example, laying foundations)
- demolition and dismantling works
- building work
- alterations, repairs and decorating
- installing systems for heating, lighting, power, water and ventilation
- cleaning the inside of buildings after construction
Work covered by CIS is subject to CIS rules.
What works are exempt from CIS?
CIS does not apply if your construction work is:
- paid for by a charity or trust
- paid for by a governing body or head teacher of a maintained school on behalf of the local education authority
- on the subcontractor’s own property and worth less than £1,000 (excluding materials)
CIS also does not apply if you’re a deemed contractor paying for:
- work on property (that is not for sale or rent) for your own business use
- a construction contract worth less than £1,000 (excluding materials)
Certain jobs are exempt from the scheme, including:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- delivering materials
- works on construction sites that are not construction, for example, running a canteen or site facilities
If you are unsure whether a job (or part of a job) falls under exemption construction work, you should call the CIS helpline.
Get a bespoke subcontractor agreement
The construction industry scheme was set up to prevent construction firms from disguising employees as subbies but it has not completely eliminated the problem.
Because of this, HMRC can still open an enquiry into employment status and can reclassify your labour-only subbies as employees. If this happens, you will be liable for paying any backdated tax and NI contributions, as well as any fines or penalties. You could also get stung for unpaid holiday, sickness and other costs.
Even if you and your subbies are registered under CIS and you make all the correct deductions and pay your tax on time, you can still attract the attention of HMRC. And if you can’t prove your subbies are genuinely self-employed, you could end up with an enquiry on your hands.
Getting a bespoke contract in place between you and your subbies can help prevent misunderstandings around employment status by demonstrating to HMRC that the relationship is genuinely one of contractor and subcontractor.
To help you ensure your contract covers all the essentials, we’ve written a book outlining exactly what you need to include.
Let us do the hard work for you
If you’d prefer to leave it to the experts, HardHats can create a bespoke contract for you. All our contracts come with an insurance-backed guarantee. This means that if HMRC ever does make an enquiry, we’ll handle it on your behalf. And, in the unlikely event they do reclassify your subbies, we’ll cover the associated costs.
Plus, we also get all your subbies to sign your agreements electronically so you don’t have to lift a finger.
Find out more about how it works here or book a call to get started.