The Construction Industry Scheme (usually called the CIS scheme) is a scheme for collecting income tax and National Insurance from subcontractors in the construction industry. It is essentially a hybrid of the PAYE system for employees and the self-assessment system for the self-employed.
The basics of CIS
In the CIS scheme, qualifying contractors must register as such with HMRC. Qualifying subcontractors can choose whether or not they wish to register for the CIS scheme. The advantage of registering is that registered subcontractors will only have 20% deducted from their wages. Subcontractors who do not register for CIS will have 30% deducted.
NB: if you are both a contractor and a subcontractor you will have to register twice. If you do not, then you will be treated as an unregistered subcontractor. If you are based outside of the UK but undertake work inside the UK then you must still follow the same rules as UK-domestic companies.
Over the course of the year, contractors will make the mandated deductions from their payments to subcontractors. These will be sent to HMRC and the contractor provided with a “payment and deduction statement”. At the end of the year, the subcontractor will submit a self-assessed tax return. This will form the basis of their actual tax calculation.
Realistically, therefore, some subcontractors will need to put away extra money for income tax and National Insurance. Others, however, may be eligible for a refund. Those in the latter category are advised to file their tax returns as quickly as possible so as to minimise the time it takes for their money to be returned to them.
The option of gross payment status in CIS
If you are a subcontractor and you choose to register for the CIS, you may be able to claim gross payment status. This means that you will receive your payments without deductions. Essentially, you’ll be treated in the same way as self-employed people from any other industry.
The baseline criteria for this are as follows:
Have a minimum level of turnover
Run your business through a bank account
Have a solid track record of paying your income tax and National Insurance in full and on time
The minimum turnover threshold depends on how your business is set up. At present, the criteria are as follows:
Sole traders must have a minimum turnover of £30,000.
Partnerships must have a minimum turnover of £30,000 per partner or £100,000 for the entire partnership.
Limited companies with a maximum of five directors must have a minimum turnover of £30,000 per director. Limited companies with six or more directors must have a minimum turnover of £100,000 for the entire company.
The practicalities of CIS
If you’re a contractor, you need to register with HMRC as a new employer. When you onboard new contractors, you need to verify their status with HMRC. If a contractor has not worked for you for two tax years, you need to verify them again. Currently, you can only use HMRC’s verification service if you’re verifying fewer than 50 contractors. Otherwise, you need to use commercial CIS verification software.
Once a contractor starts working for you, you need to file monthly tax returns with HMRC. Currently, these need to be submitted by the 19th of the month. The deductions you collect need to be sent to HMRC by the 22nd of the month. You should keep all relevant records for three years after the end of the relevant tax year.
If you’re a subcontractor and expect to pay the base rate or less, it’s strongly advisable to register for the CIS scheme. That way, you’re less likely to overpay your taxes and then need to wait for HMRC to process a refund. It’s also advisable to break out all legitimate expenses on your invoice. This will allow your contractor to base your deductions on your net income.
As with contractors, you must keep full and accurate records of all your income and expenses. These should be stored for at least three years after the end of the relevant tax year.
We Can Help
If you’d like to learn more about the Construction Industry Scheme (CIS), then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.