Construction Industry Scheme (CIS) – What is it?
CIS stands for Construction Industry Scheme, which contains rules set out by HMRC on how subcontractors working within the construction industry should be paid
Under the CIS scheme, a percentage of the payment from a contractor to a registered subcontrator is deducted and transferred to HMRC.
How CIS works
If you are a subcontractor, which many small businesses (especially sole traders) are in the UK construction industry, then it is necessary to register with HMRC. If your business plans to use the skills of subcontractors (not as employees), it is necessary to first register with CIS.
If you have a company and decide to use a subcontractor who is CIS registered, it is your responsibility to account for their tax. Currently 20% tax is deducted from the subcontractor’s fee and should be stated on the invoice. For unregistered subcontractors, 30% is deducted.
This will normally be held in your accounts and posted to a holding account that provides details on the subcontractor. It will then be paid to HMRC the following month. These deductions are counted towards the pay for the subcontractor and also contribute to tax purposes.
Complying with CIS
CIS was introduced to decrease the opportunities for tax evasion in the construction industry. As a company registered to use the services of a subcontractor, it is important to adhere to the responsibilities, including recording the transactions and submitting monthly returns to HMRC.
It is crucial that you notify anyone within your company who deals with the business transactions on a daily basis of the obligations to record these transactions and payments correctly.
For more information and to safeguard that you, as a company, are currently complying with all regulations concerning CIS, visit the HRMC website.
Making payments on CIS
If your business finds itself in a period where you are not planning to use the services of any subcontractors, you should request for your status to be changed to ‘inactive’ so that you do not receive any returns for that period.
If your business already employs people and uses PAYE, you can still register for CIS if you plan to hire subcontractors. HMRC assists in getting accounts set up correctly to work with both PAYE and CIS.