What’s the Construction Industry Scheme?

The Construction Industry Scheme (CIS) serves as a regulatory framework for contractors and subcontractors operating within the United Kingdom’s construction sector aimed at ensuring compliance and efficiency within the industry.

How does the Construction Industry Scheme (CIS) work?

According to the Construction Industry Scheme (CIS), contractors are responsible for deducting money  from subcontractor payments and remitting them to HM Revenue and Customs (HMRC). These deductions serve as pre-payments toward the subcontractor’s tax and National Insurance obligations.

Contractors and subcontractors

Under the framework of the Construction Industry Scheme (CIS), both contractors and subcontractors play integral roles in maintaining compliance and facilitating efficient operations within the construction sector of the United Kingdom.

On the one hand, contractors bear the responsibility of deducting specified amounts from payments made to subcontractors and transferring these funds to HMRC as advance payments for the subcontractors’ tax and National Insurance obligations. You fall under the category of a contractor if you pay subcontractos for construction services or if your business has expended over £3 million on construction within the 12 months following your initial payment. This criterion applies even if your business doesn’t directly undertake construction activities.

On the other hand, a subcontractor under the Construction Industry Scheme (CIS) is an individual or business hired by a contractor to perform construction work or provide construction services. This can include various trades such as carpentry, plumbing, electrical work, and more. Subcontractors typically work under the direction and supervision of the contractor and are paid for their services.

If you fall under both categories, you must register for CIS as both.

The purpose of the Construction Industry Scheme (CIS)

The Construction Industry Scheme ensures accountability and transparency throughout the construction supply chain, promoting fair practices and fiscal responsibility among all involved parties.

Work subject to CIS regulations

This encompasses a wide array of tasks and projects within the construction sector, including but not limited to building, renovation, infrastructure development, and installation services. Essentially, any construction work performed by contractors or subcontractors in the United Kingdom is subject to CIS regulations.

The scope of work covered by CIS extends to various specialties within the construction industry, from carpentry and plumbing to electrical work and beyond. It also includes civil engineering projects such as the construction of roads, bridges, and other infrastructure works.

Let’s see some examples:

  • site preparation including laying foundations, demolition, and dismantling.

  • building activities.

  • renovations, maintenance, and decorating.

  • the installation of heating, lighting, power, water, and ventilation systems.

  • cleaning the building once the contruction is completed.

Works that don’t fall under the CIS:

  • surveying and architecture.

  • scaffolding rental (excluding labour).

  • carpet installation.

  • manufacturing construction materials.

  • material delivery.

  • tasks that are not directly related to construction activities.

Registration for the Construction Industry Scheme

Although only contractors must register with HMRC for the CIS, subcontractors should also register in order to save 10% on their tax bill.

Those subcontractors who prefer to handle their tax and National Insurance contributions without any deductions, will have to pay the full amount owed at the end of the year.

Why should contractors register?

When subcontractors are not registered under the Construction Industry Scheme (CIS), deductions are taken from their payments at a higher rate compared to registered subcontractors. This practice encourages subcontractors to register for CIS and comply with the scheme’s regulations.

Subcontractors who opt not to register for CIS will face a tax deduction rate of 30%. Conversely, subcontractors who choose to register will incur a reduced rate of 20%, resulting in a savings of 10%.

Apart from this, distributing the burden of tax and National Insurance evenly throughout the year helps to mitigate unexpected surprises at the end of the fiscal year.

How to proceed as a contractor for CIS

Before engaging your first subcontractor, register for CIS as an employer through HMRC. Make sure you should not be employing a worker instead to avoid penalties.

You’ll get a letter from HMRC with the information needed to start working as a CIS contractor.

To confirm a subcontractor’s CIS registration status, you can utilise either the HMRC Online service or a CIS accounting software.

Contractors are responsible for withholding taxes to subcontactors for income tax and National Insurance purposes. A CIS tax return calculator within the accounting software can help automate this process.

Each month, it is necessary to inform HMRC about the payments made to subcontractors by submitting your CIS monthly return.
There are two options:

On the CIS monthly return, contractors are required to confirm that the listed subcontractors are not classified as employees. Providing an incorrect employment status for a subcontractor on your monthly return could result in a penalty of up to £3,000.

Contractors must keep records of:
  • the total sum of each payment billed by subcontractors, excluding VAT.
  • any deductions made from subcontractor payments.

These details should be kept for a minimum of 3 years after the end of the tax year they pertain to. Failure to produce CIS records upon request by HMRC may result in fines of up to £3,000.

CIS tax return software on Microsoft Business Central

With a CIS tax return software like Pryme Tax Retention, CIS deductions are automatically calculated on your bills and invoices. Additionally, you can conveniently submit your monthly CIS returns directly from Microsoft Business Central, consolidating your business finances on ONE single platform.

Manage your CIS deductions, and your CIS returns directly from Business Central.