If your company operates in the construction industry or does construction-related work, you may need to register with HMRC as a contractor or sub-contractor. The Construction Industry Scheme (CIS) is a taxation scheme for individuals and businesses, including limited companies, working within the construction industry. It sets out the rules for how payments to subcontractors for construction work must be handled by contractors.
A contractor is a business or other concern that pays sub-contractors for construction work. A subcontractor is a business that carries out construction work for a contractor. Your business can work as both contractor and subcontractor.
The CIS covers all construction work carried out in the UK (and its territorial waters up to the 12 mile limit) and covers many operations such as site preparation, demolition, construction and repairs. All types of businesses that work within the construction industry are covered by the scheme such as companies, partnerships, and self-employed individuals.
The operations carried out (either as defined in your contract or the operations actually undertaken if different) determine whether the work is within the scheme or not. Some activities on construction sites are not regarded as construction operations under the CIS. These include activities such as provision of medical or safety services and professional work (including ancillary work of engineers, architects, surveyors).
It will normally be the contractor who decides whether a sub-contractor operates within the CIS, but you should consult HMRC to confirm this. The contractor needs to verify with HMRC that the sub-contractor is registered under the CIS before any payments can be made.
If you are unsure whether you are carrying out work which is covered by the scheme, you can contact HMRC directly on: 0845 366 7899.
How CIS works
CIS is a scheme that involves tax being deducted at source from payments relating to construction work. CIS requires the contractor to deduct tax at source on any payments it makes to a subcontractor. The rate at which tax will be deducted depends on the registration status of the subcontractor.
If you, as the subcontractor, then subcontract any of your obligations under the contract with the original contractor to another party you become a contractor. You will then be required to apply CIS rules to payments made to your subcontractor. This is how you can be both contractor and subcontractor.
Once the contractor has deducted tax, the subcontractor has satisfied relevant liabilities regarding amounts due to HMRC in respect of income tax. You must keep sufficient records in order to complete your tax return and to show the direct cost of materials.
Where your company is paid under deduction for work done within the construction industry you should offset the CIS deductions during the tax year against the company's monthly or quarterly liabilities for PAYE/National Insurance contributions (NICs) and any CIS deductions taken from the company's own subcontractors.
From April 2016, It will be a requirement to file CIS returns online and you will not be able to submit paper returns, other than in certain circumstances.. As well as submitting returns, you will also need to amend and resubmit your returns online. This applies to new returns and also where any corrections or amendments from previous returns need to be submitted.
At the end of the tax year the company should account for all CIS deductions made from its payments and offset against its own liabilities on the company's P35 Employer Annual Return. Where your company believes that a repayment is due at the end of the tax year, you must make a request in writing for this repayment.
CIS tax deduction rates
If you are not registered for CIS, the contractor will make a 30% tax deduction from your pay. Once registered HMRC will contact you to confirm the registration and provide you with all the information you require HMRC will also determine at this point whether you can be paid gross or with tax deducted at a 20% rate.
The criteria to determine the payment status are decided from 3 tests:
The Business Test: Your business must carry out construction work or provide labour for construction work in the UK and the business must be run largely through a bank account.
The Compliance Test: The business, and any directors in the company, must have submitted all appropriate tax returns and paid all taxes due on time in the last 12 months before the application for gross payment to apply.From April 2016, Directors’ self-assessment obligations will no longer be taken into account when assessing whether a company is eligible for gross payment status.
The Turnover Test: HMRC will review the business turnover from construction work for the preceding 12 months ignoring VAT & the cost of any materials. The turnover must be at least £30,000.00 for a sole trader and at least £30,000.00 for each director of the company.From April 2016, where a a company has multiple directors or partners, the limit for determining gross payment status will be reduced from £200,000 to £100,000.
If these criteria are met HMRC may authorise gross payment to the sub contractor. If these criteria are not met but the business is registered within the CIS scheme then 20% tax deduction will be authorised. If the business is not registered for the CIS scheme then a 30% deduction will be set and only reviewed once the registration process has been completed.
Registering for the Construction Industry Scheme (CIS)
All contractors have to be registered with HMRC for the CIS. Subcontractors who do not wish to have tax deductions made from their payments at the higher rate should also register with HMRC.
To register as a contractor within the scheme you need to contact HMRC on 0845 60 70 143. To register as a subcontractor within the scheme you need to contact HMRC on 0845 366 7899.