Construction Industry Scheme (CIS) For Contractors

If you work in construction and hire the services of other construction businesses you need to be aware of the Construction Industry Scheme (CIS). The scheme is where contractors deduct tax on the behalf of their sub-contractors and then pay this tax to HM Revenue and Customs (HMRC).

First, you would register as an employer with HMRC, making sure to note that you will be taking on sub-contractors and using the CIS. The next step is to verify any sub-contractors that you have working for you, so HMRC can ensure you deduct the correct amount of tax.

How to verify sub-contractors

You can verify a sub-contractor through the CIS helpline or the software or service you are using to manage your CIS. You will need the sub-contractor’s trading name, Unique Taxpayer Reference (UTR) and either their National Insurance number or company registration number depending on if they are a sole trader or limited company.

Once verified you will receive a verification number and the rate you will need to deduct tax from the sub-contractor’s invoices at.

Deducting tax from sub-contractor invoices

When you receive an invoice from your subcontractor, you must deduct tax from the labour portion of the invoice amount only. This means you subtract any VAT or materials that have been added to the invoice before deducting tax.

Tax can be deducted at one of three rates:

• 20% is the standard rate for registered and verified subcontractors.
• If a subcontractor is not registered with CIS, you would deduct at 30%.
• If the subcontractor has gross payment status, you will not deduct any tax at all.

You will also need to produce a payment and deduction statement to give to the subcontractor. This shows the invoice amount and lets them know how much tax was deducted.

Submitting CIS returns

Every month you need to submit a CIS return. The returns cover the period from the sixth of a month to the fifth of the following month. Any tax you have deducted for that period must also be paid to HMRC, with the deadline for both being the 19th of the following month (or the 22nd if paying electronically). You can pay the CIS tax alongside any employee tax and National Insurance Contributions (NICs) due that month.

What are the penalties for not filing on time?

If you do not file the return on time, you will be liable for a penalty which starts at £100 for one day late. You receive an additional penalty of £200 for being two months late. At six and twelve months late, you receive further penalties of £300 or five per cent of the tax owed, whichever is higher.

If you inform HMRC that no subcontractors were paid during the period, the penalty will be cancelled.

Keeping Records

Be sure to keep records of all invoice amounts, broken down by labour, materials and VAT. You will also need to keep records of the tax deducted. This will be helpful if HMRC decides to look into your business.

If you require any more information or advice regarding the above, or for CIS or payroll in general, please do not hesitate to contact us or have a look at our accounting services for contractors.