CIS (Construction Industry Scheme) for Contractors and Sub Contractors - FAQs
If you are a contractor or sub contractor it is important you are aware of HMRCs Construction Industry Scheme or "CIS" for short and the rules involved.
Below are some of the most frequently asked questions.
Who does CIS apply to?
CIS applies to contractors and certain other businesses that make payments to sub contractors for constructions works.
Which works are covered by CIS?
All construction works carried out in the UK including site preparation, alterations, dismantling, construction, repairs, decorating and demolition.
Which businesses are covered by CIS?
All businesses that work in the UK construction industry including companies, partnerships and self-employed individuals.
How does CIS work?
All payments made to sub contractors must take into account the sub contractors tax status according to HMRC. This may require the contractor to make a deduction from the payment to a sub contractor, which they then pay to HMRC. This does not include the cost of materials purchased by the sub contractor for that particular job.
Do I need to register for CIS?
All contractors must register for CIS plus any subcontractors that do not want deductions taken from their invoice at the higher rate (see below for more details on deductions).
As a contractor how do I know what to deduct from payments to sub contractors?
Before a contractor makes the payment they will need to verify with HMRC if the sub contractor is registered with HMRC for CIS. HMRC will then notify the contractor on the rate of deduction to be taken or if no deduction is required at all.
If a CIS deduction is required what do I need to do?
As a contractor you must - calculate the deduction, make the deduction, record details of the payment, materials and deduction, make the net payment to the subcontractor and complete and give the appropriate statement of deduction to the subcontractor.
Do I need to file a CIS return to HMRC?
Yes, every month contractors must send HMRC a complete return of all CIS payments made (or tell HMRC if there have been no payments). The CIS return will include details of the subcontractors, details of the payments made, any deductions withheld, a declaration that the employment status of all subcontractors has been considered and a declaration that all sub contractors that need to be verified have been verified.
CIS returns must be filed with HMRC within 14 days after the end of the monthly period they apply to.
Does CIS apply to payments to employees?
No, the scheme only applies to workers who are self employed under the terms of the contract not employees paying PAYE.
How does CIS apply to sub contractors that are limited companies?
CIS deductions from work completed by the sub contractor company can be offset against the companies PAYE, NI, student loan and CIS liabilities. If CIS deductions for works completed by the company are more than these liabilities then it can be refunded or set off against corporation tax.
As a contractor when should I apply?
When you are about to take on your first sub contractor.
As a sub contractor when should I apply?
When you or your firm is about to start work in the UK construction industry.
Which businesses are deemed contractors under CIS?
"Mainstream Contractors" include business involved in construction operations, property developers, speculative builders, foreign businesses that carry out construction operations in the UK.
"Deemed Contractors" include large manufacturers, department stores, breweries, banks, oil companies, property investment companies, local authorities, development corporations, new town commissions and housing associations.
Which businesses are not deemed contractors under CIS?
Ordinary householders that are having work done on their own premises, such as new house building, decoration, repairs or an extension. In addition to this any businesses (not including construction operations) whose average annual expenditure on construction work over the last 3 years has been less than £1 million.
Are there any types of construction works under which contractors and sub contractors are exempt?
Yes but this only applies to "deemed contractors" (see details above on who is a deemed contractor). Such works include works to buildings used by the company itself (that is not investment property), offices, warehouses and nursing homes.
How about small payments for works?
Works of less than £1,000 can be authorised as exempt by HMRC for "deemed contractors" , this does not apply to "mainstream contractors" such as construction companies and property developers.
Does CIS apply to agency workers?
Only in exceptional circumstances, in the vast majority of cases the worker will be classed as an employee of the agency paying PAYE and not a sub contractor - so CIS does not apply.
What are the different rates of deductions?
There are two rates - the standard rate and the higher rate. Standard rates apply to subcontractors registered with HMRC for CIS, the higher rate applies to subcontractors that HMRC are unable to identify.
What parts of an invoice for works does CIS apply to?
CIS deductions applies to labour, subsistence and travel expenses. CIS deductions do not apply to material costs or VAT.
When does a contractor NOT have to verify a sub contractor?
If the sub contractor was included in a CIS return for the current or previous two tax years.
As a contractor do I need to provide any information to a sub contractor?
Yes, the contractor must provide a written statement to the sub contractor of any deductions no later than 14 days after the end of the monthly reporting period.
Is there any software that helps with CIS calculations and CIS payments to HMRC?
Yes, we strongly recommend Xero cloud accounting software to manage CIS - using Xero saves a lot of time, reduces errors and connects directly to HMRC making CIS payments easier. You can read more about using Xero for CIS here - www.xero.com/construction-industry-scheme
How about if I haven't paid any sub contractors for that month?
HMRC will need to be informed by the 19th of the month after the last month in which a CIS submission was made.
Is there an annual return for CIS?
How about record keeping?
Contractors must keep records for 3 years after the end of the tax year to which they relate and make records available on request. Cloud accounting software such as Xero enables a PDF of the original invoice to be uploaded with the digital invoice eliminating the need to keep paper copies.
Are there any penalties for late CIS returns?
If the CIS submission deadline is missed the initial penalty is £100, then a second fixed penalty of £200 2 months after the filing date, 6 months after the filing date this increases to either a £300 fixed penalty or 5% of deductions on the CIS return (whichever is greater), the same penalty applies 12 months after the filing date.
So it is very important that CIS return filings are timely and accurate.