For those working in the construction industry, including builders, electricians, and painter/decorators, CIS is a tax scheme designed by HMRC to minimise tax evasion within the industry.
The construction industry scheme (CIS) is a set of rules that HMRC insist that contractors must follow when they are engaging subcontractors to provide work in the construction industry.
When a contractor does engage a subcontractor, the contractor must assess the subcontractor’s employment status to determine if the subcontractor is self-employed or if they should be employed by them. If they consider that they are self-employed, then the contractor might need to make a deduction to the subcontractor’s pay in order to account for CIS tax, which acts as an advance payment of the subcontractor’s tax and NI.
To aid a contractor in assessing the employment status of a subcontractor, HMRC have provided an “employment status indicator” (ESI) tool that is free to use online. This can be found here. Once the questions have been answered truthfully then the result of this test can be relied on if subject to questioning by HMRC.
Who counts as a contractor/subcontractor?
For CIS purposes, a contractor is anyone who engages a subcontractor to work in the construction industry or who spends over £1m a year over a 3-year period on construction.
A subcontractor is simply someone who is engaged to work in the construction industry by a contractor. Some may find that they fall into both categories and therefore must follow the rules for both contractors and subcontractors.
What you need to do if CIS applies
If you are a contractor as defined above, then you have to register for CIS with HMRC. While subcontractors should register, they are not required to. That said, it is worth noting that if a subcontractor does not register for CIS they will suffer a higher deduction. This higher deduction would be 30% where if registered, the standard rate of deduction would be 20%.
When a contractor makes a deduction under CIS, this is set off against the subcontractor’s tax liability and will be considered in line with their Self-Assessment tax return (SATR). Overpayments or underpayments would then be accounted for. The deduction is not applied to fees the subcontractor is charging for materials.
It is possible for a subcontractor to be paid in full without deductions if they meet HMRCs criteria that can be found here.
All contractors have to report to HMRC with details of payments and deductions that they have applied to subcontractors. This report is in the form of an online return (CIS300) and failure to do so will result in penalties.