Construction Industry Scheme (CIS) Accountants

HMRC established the Construction Industry Scheme (CIS) to regulate tax payments for contractors and subcontractors in the building sector. With its complex rules and regulations, navigating CIS can be a challenging task, but at Mercian Accountants, we have extensive expertise in CIS registration, returns, and payments to ensure your financial compliance. Whether you’re a construction company, partnership, or self-employed individual, if you need help navigating the CIS scheme, please contact our friendly team today, or carry on reading to find out more.

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What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme requires contractors to deduct money from subcontractors’ payments for tax and National Insurance contributions. These deductions are then forwarded to HMRC on behalf of the subcontractors. The scheme is designed to prevent tax evasion and ensure proper tax compliance within the construction sector.

Construction Definition for CIS

According to HMRC, construction work for CIS is defined as follows:

Work on a permanent or temporary building or structure: encompassing residential, commercial, industrial, or other types of properties
Civil engineering work: such as the construction of roads, bridges, tunnels, dams, and other infrastructure.

Within the context of the Construction Industry Scheme, HMRC specifies that the following activities are considered construction work:

Site preparation: this involves activities like laying foundations, providing access works, and preparing the construction site for building or civil engineering work
Demolition and dismantling: the process of demolishing existing structures or dismantling components as part of a construction project
Building work: this includes the construction of new buildings or structures, as well as additions, extensions, and renovations to existing ones
Alterations, repairs, and decorating: any modifications, repairs, or decorative work carried out on buildings
Installation of systems: such as heating, lighting, power, water, ventilation, and other systems within structures
Post-construction cleaning: cleaning the interior of buildings after construction work is completed.

It’s important to note that while construction work typically falls under the CIS scheme, there may be exceptions or specific criteria to consider. You don’t have to register if you only do certain jobs, such as architecture and surveying, carpet fitting, delivering materials, and more. It is advisable to seek professional advice before registering or engaging in construction-related activities.

The Difference Between PAYE and CIS

CIS employs a standardised approach, typically applying a fixed rate of 20% for tax deductions by contractors. However, as a PAYE employee, your tax code determines your tax liability, and the amount owed can fluctuate based on your income level.

CIS Registration

So how do you know if you need to register for CIS? According to HMRC, registration rules apply for the following:

CIS Registration for Contractors

Registering for CIS as a contractor is mandatory if:

You hire subcontractors: to carry out construction work on your behalf.
Your total expenditure on construction work exceeds £3 million within a 12-month period: regardless of whether construction is your primary business activity or not.

It’s important to note that your company’s legal structure (sole trader, partnership, or limited company) doesn’t affect the registration requirement. Timing is crucial, as you must register for CIS before engaging your first subcontractor, rather than afterwards.

Already registered as a contractor? Then you have the convenience of accessing the CIS online service, where you can easily file your monthly returns or verify the details of a subcontractor. It provides a streamlined process for managing your CIS obligations and ensuring compliance with the scheme.

Responsibilities for Contractors

As a registered contractor for CIS, you have a range of responsibilities, as outlined below:

Subcontractor verification: you must verify the registration status of subcontractors, which enables HMRC to determine the appropriate deduction rate. However, if the subcontractor has been included in any CIS returns filed during the current tax year or the two previous tax years, this verification step is not necessary.
Subcontractor deductions: when a deduction is applicable (i.e., the subcontractor does not have gross payment status), you, as the contractor, must calculate the deduction amount, make the net payment to the subcontractor, maintain comprehensive records, and provide a deduction statement to the subcontractor.
CIS monthly returns: contractors also have the responsibility of submitting monthly CIS returns to HMRC. These returns provide a detailed account of the subcontractors they have worked with, specifying the payments made and disclosing any deductions. The statement accompanying the return must also confirm that the employment status of subcontractors has been assessed appropriately and that all subcontractors have undergone proper verification.
CIS payments: each month, contractors are required to send on their CIS payments for the deductions made. Many contractors set up a separate holding account within their accounting system to keep the funds separate.

CIS for Subcontractors

If you’re a subcontractor, you’re not required to register, but you may face higher deductions from your payments if you remain unregistered. It’s also important to note that you only pay tax under CIS if you are self-employed – if you work as an employee and consistently receive work from the same contractor, you should have PAYE status. Employee taxes and National Insurance contributions are deducted directly from their pay before receiving it, are entitled to employment rights such as sick leave, and may not need to file a tax return.

CIS Registration for Contractors and Subcontractors

In certain cases, businesses may both subcontract their services to others and hire subcontractors for their own projects. If you find yourself in this situation, it is advisable to register as both a contractor and subcontractor, adhering to the relevant rules and processes for each scenario.

To streamline the process of managing CIS invoices and deduction statements, our expert CIS accountants can help and advise on appropriate CIS accounting software. This combination ensures efficient handling of CIS-related paperwork and allows for quicker completion of administrative tasks – contact us today.

Deduction Rates for CIS

When determining the amount of tax to be deducted under the Construction Industry Scheme, the standard rate is 20%, although there are three possibilities:

20% for registered subcontractors: registered subcontractors have tax deductions of 20% made from their payments
30% for unregistered subcontractors: unregistered subcontractors face a higher deduction rate of 30%. This provides a significant incentive for new subcontractors to register with the scheme
0% for subcontractors with “gross payment” status: Subcontractors with “gross payment” status are not subject to any deductions. Instead, the contractor pays them the full amount, and the subcontractor is responsible for settling all applicable tax and National Insurance obligations at the end of the year through their Self-Assessment Tax Return.

How to Get “Gross Payment” Status

Gross payment status is subject to strict criteria, and providing false information can result in fines from HMRC. To qualify for gross payment status, you must meet the following:

Tax compliance: demonstrate a record of timely tax and National Insurance payments
UK construction business: your business must be involved in construction work or provide labour within the construction industry in the UK
Bank account: Your business must have a bank account tied to it.

In addition, there is a turnover requirement based on the last 12 months:

Sole traders: turnover (excluding raw material costs and VAT) must be £30,000 or more.
Partnerships: Each partner’s turnover must be £30,000 or more, or the partnership’s total turnover must be at least £100,000
Companies: Each individual director’s turnover must be £30,000 or more, or the company’s total turnover must be a minimum of £100,000.

If your company is “controlled by five people or fewer,” each of them must have a turnover of at least £30,000.

CIS Reclaims

If you have purchased materials or accrued expenses for a job, such as tool hire, it is possible to claim a tax refund under the Construction Industry Scheme. This refund can arise if you have overpaid your tax as a result of these expenses.

It’s important to note that CIS does not consider your Personal Allowance, which is the tax-free threshold for UK taxpayers (set at £12,570 for 2023). Consequently, self-employed sole traders without gross payment status often find themselves overpaying tax and becoming eligible for a tax rebate. However, it’s essential to remember that National Insurance contributions are also a factor and will reduce the overall refund amount.

Need Help from CIS Accountants?

We have a team of experts who are fully trained and up to date with the latest changes in CIS. We can assist you with the following services:

Verification: we can help you get verified by HMRC, ensuring you are eligible to receive payments under the CIS
Monthly Returns: our experienced team can prepare and submit your monthly returns to HMRC on your behalf
Record Keeping: we can assist you in keeping accurate records of payments and deductions, ensuring you are CIS-compliant
Tax and National Insurance: by calculating the tax and National Insurance due on your CIS payments, we will ensure that you pay the correct amount.

Whether you are a small business embarking on its initial ventures or experiencing rapid growth, our dedicated team is committed to managing your CIS affairs. You can message us through our online form, call 01743 562430, or email hello@mercianaccountants.co.uk.