Construction Industry Scheme

As the name suggests, the scheme only applies to the construction industry including many trades such as plumbing and heating engineers, electricians, and decorators. It does not apply to work on construction sites which is clearly not construction, such as cleaning.

Contractors must register for CIS before work begins. Whilst subcontractors do not need to register, tax will be taken at a higher rate if you are not registered so it is advised to do so.

Self-employed tradesmen who only work directly with their clients and do not provide subcontracted work for contractors nor subcontract work to others, do not need to register under the scheme.

A contractor is a business or individual that hires subcontractors to complete construction
work, with the exception of ordinary householders.You must register as a contractor if either:

• you pay subcontractors for construction work
• your business doesn’t do construction work, but you spend an average of more than £1 million a year on construction in any 3-year period

You must register as a subcontractor if you do construction work for a contractor.

If can fall under both categories, in which case you must register for both.

If you are classed as a contractor under the Construction Industry Scheme, you will need to register as such with HMRC before any work begins.

Contractors must deduct tax at either 20% or 30% on the net payments to subcontractors and pass this on to HMRC by the 19th of the month if the payment to HMRC is by cheque or cash or by the 22nd if an online payment is made.

The contractor is liable for any penalties should payments not be made in time or in full and are responsible for paying the relevant taxes to HMRC regardless if they deduct them from the subcontractor or not.

Within 14 days of the end of the tax month, contractors must also submit a return to HMRC via their online service or a CIS software supplier, reflective of the payments made. If no relevant payments have been made, then you must tell HMRC by the 19th day of the month.

Contractors will need to verify subcontractors they have not paid previously under CIS with HMRC via their online service or CIS software.

Most self-employed individuals are likely to find themselves as a subcontractor rather than a contractor.

You do not have to register for CIS however you will have deductions made at 30% of your earnings instead of 20% if you are not registered.

You can register as a subcontractor via HMRC’s online service after you have registered for self-assessment (you’ll need to log in to the Government Gateway service with the same credentials).

You can apply to HMRC not to have deductions made by the contractor, instead opting to complete your finances at the end of the year, referred to as ‘gross payment status’. You must meet a number of criteria to qualify including an annual turnover of £30,000 a year, all business is run through a bank account, and you have historically paid your taxes on time. HMRC will review your gross payment status once a year.

CIS covers construction work to:

• a permanent or temporary building or structure
• civil engineering work like roads and bridges
• For the purpose of CIS, construction work includes:
  
  
• preparing the site, e.g. laying foundations and providing access works
• demolition and dismantling
• building work
• alterations, repairs and decorating
• installing systems for heating, lighting, power, water and ventilation
• cleaning the inside of buildings after construction work

 

You don’t have to register if you only do certain jobs, including:

• architecture and surveying
• scaffolding hire (with no labour)
• carpet fitting
• making materials used in construction including plant and machinery
• delivering materials
• work on construction sites that’s clearly not construction, e.g. running a canteen or site facilities

You could incur a penalty of up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return. You do not have to file a return for the months when you made no payments to subcontractors, but you must tell HMRC that no return is due.

Penalties for late returns

If you miss the deadline for filing your returns, you may incur a penalty (if you didn't pay any subcontractors, you can let HMRC know and the penalty will be cancelled).

How late the return is	Penalty
1 day late	£100
2 months late	£200
6 months late	£300 or 5% of the CIS deductions on the return, whichever is higher
12 months late	£300 or 5% of the CIS deductions on the return, whichever is higher

You may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher, for returns more than 12 months late

If you disagree with a penalty you can appeal within 30 days of the date on the penalty notice through HMRC’s online service by writing to HMRC

It should be noted that HMRC can and do issue additional penalties in respect of CIS following an enquiry.