All About The Construction Industry Scheme & How To Benefit From It
HM Revenue & Customs (HMRC) created the Construction Industry Scheme (CIS) for contractors and subcontractors in order to minimise tax evasion within the construction industry. A number of self-employed workers in the UK continue to increase so the CIS had to be created to prevent significant losses for the Exchequer.
CIS is applicable to all contractors and subcontractors, including sole traders, partnerships or companies, that work in the construction industry. In addition, businesses that don’t fall under the construction tag but engage in construction work such as local authorities, housing associations and property developers, and spend £1 million or more each year in a three-year period need to comply with CIS. Here are the types of work that fall under the construction tag:
- general building (bricklaying, plastering, roofing, etc)
While CIS covers all construction work, there are specific jobs that aren’t covered and that includes:
- architecture and surveying
- scaffolding hire
- carpet fitting
- delivering materials
- working on construction sites on a non-construction related job, e.g. running a canteen
The rules outlined in CIS apply to all payments made by a contractor to a subcontractor under a construction contract. However, it does not apply to all employees. Those who don’t comply with the scheme will face expensive penalties. Lastly, CIS rules apply for businesses that are based outside of the UK, but do construction work on a contractor or subcontractor work in the UK.
How to know if CIS applies to you?
To illustrate this point clearly, here’s a look at two examples:
- John is a self-employed electrician. He performs rewiring work on a factory building for Peter, who is a self-employed builder. The work John does is covered by the CIS.
- Frank is a self-employed electrician. He does rewiring work on the house of Steven, who is a private homeowner. Steven pays Frank for his work and as a result, Frank’s work isn’t covered by the CIS.
It’s also important to note that even when receiving pay from a customer but needing to split the amount with another person, then this relationship falls under the contractor-subcontractor relationship.
CIS for Contractors
- You have to register with CIS if the following are applicable to you:
- you pay subcontractors for construction work
- your business isn’t classified as doing construction work, but annual your annual spend on construction amounts to more than £1 million
- As a contractor, you also need to follow certain rules:
- You have to register with CIS before hiring first subcontractor.
- You have to check if you should employ a worker rather than subcontracting them. Penalties will be given if you should have hired them as an employee instead.
- You have to check with HMRC to see that your subcontractors are registered with CIS.
- You have to deduct money from your subcontractor’s pay to give to HMRC which counts towards their tax and National Insurance bill.
- You have to file monthly returns and keep all CIS records. Otherwise, you will get penalised.
- You need to let HMRC know if there are any changes to your business.
CIS for Subcontractors
You should register for CIS if your work for a contractor and are either:
- the owner of a limited company
As part of CIS, a contractor deducts 20% from your payments to give to HMRC. The deductions count towards your tax and National Insurance Bill. Although you can choose not to register with CIS, contractors will deduct 30% from your payments if that is the case.
- You are guaranteed regular income. As a self-employed worker, you are rest assured of being paid for the work you’ve done. Otherwise, it’s fairly easy to make a complaint when you haven’t been paid.
- You get benefits. When contractors make deductions to your pay, these go to your tax and National Insurance bill. For a self-employed worker, being covered and paying taxes offers lots of benefits.
CIS may be a difficult web to navigate given the scope of construction work that is or isn’t covered, but it’s one that is necessary for the good of contractors and subcontractors.