The Construction Industry Scheme (CIS) sets out how contractors must handle payments to subcontractors for construction work. Depending on the subcontractor's tax status, the contractor may need to deduct tax from the payment and pass it to HMRC.
CIS deductions are advance payments towards the subcontractor's tax and National Insurance bill. They are not a final tax charge.
This article provides a general introduction to CIS and is not tax or legal advice. The rules can depend on the contract and the work being carried out, so ask for advice if you are unsure.
What work is within the scope of CIS?
The scope of CIS describes the construction work covered by the scheme. It includes work such as site preparation, demolition, building, alterations, repairs, decorating and installing systems for heating, lighting, power, water or ventilation.
Some work is excluded when it is carried out on its own. For example, bricklaying is normally within CIS, while carpet fitting by itself is normally outside the scheme.
The contract and the circumstances matter, not just the subcontractor's trade. If a contract includes construction operations as well as other work, the mixed-contract rules can bring all payments under that contract within CIS.
HMRC's A to Z guide to construction operations gives more detail about work that is included or excluded.
Who is a contractor or subcontractor?
Contractor
A contractor is a business or other organisation that pays subcontractors for construction work. Construction companies and building firms are common examples.
A business outside the construction industry can also become a contractor for CIS if it spends more than £3 million on construction work in a rolling 12-month period. This is sometimes called a deemed contractor. Private householders are not normally contractors under CIS.
Subcontractor
A subcontractor is a business that agrees to carry out construction operations for a contractor. It could be a sole trader, partnership or company, and may complete the work itself or arrange for its own workers or subcontractors to do it.
A business can be both a contractor and a subcontractor. It must follow the contractor rules when paying subcontractors and the subcontractor rules when receiving payment from another contractor.
Agency
An agency can be a subcontractor under CIS where it supplies a worker to carry out construction operations under a contract between the worker and the agency. The contractor will then apply CIS when paying the agency.
The agency may also have separate PAYE or CIS responsibilities when paying the worker. This depends on the working arrangement and the worker's employment status.
Does CIS replace an employment status check?
No. Before applying CIS, the contractor must consider whether the person carrying out the work is genuinely self-employed for that contract.
CIS does not apply to payments made under a contract of employment. Calling someone a subcontractor or giving them a CIS payment and deduction statement does not decide their employment status.
Contractors must declare on each monthly CIS return that they have considered the employment status of every subcontractor listed. Incorrectly treating an employee as self-employed can lead to unpaid PAYE and National Insurance, interest and penalties.
When must I verify a subcontractor?
Before making a first payment to a new subcontractor, a contractor will normally need to verify them with HMRC. Verification checks that HMRC can match the subcontractor and tells the contractor which deduction rate to use.
You may not need to verify them again if you included the same subcontractor on a CIS return in the current tax year or either of the previous two tax years. HMRC will tell you if a recorded payment status changes.
The verification result will normally be:
- Gross payment status: deduct 0%.
- Registered and verified: deduct 20%.
- Unregistered or unable to be matched: deduct 30%.
Keep the verification details and use the rate HMRC gives you. A subcontractor cannot simply ask the contractor to use a different rate.
How do I calculate the CIS deduction?
Start with the total amount on the subcontractor's invoice. Before applying the CIS rate, take away amounts that are not included in the deduction calculation, such as:
- VAT.
- Materials the subcontractor paid for directly.
- Consumable stores.
- Fuel used for the work, but not travelling costs.
- Plant hire for the job.
- The cost of manufacturing or prefabricating materials.
Apply the rate HMRC supplied to the amount left. The contractor pays the net amount to the subcontractor and pays the deduction to HMRC.
Do not automatically accept every amount described as materials. You can ask the subcontractor for evidence, such as receipts, showing what they paid directly. Each invoice should be checked carefully.
Do I need to give the subcontractor a statement?
Yes, if you make a deduction. The contractor must give the subcontractor a payment and deduction statement within 14 days after the end of the tax month.
The statement should show the contractor and subcontractor details, the gross payment, any materials that reduced the deduction basis, and the CIS tax deducted. Subcontractors should keep these statements because HMRC may ask for evidence when they claim credit for CIS deductions.
When are CIS returns due?
A CIS tax month runs from the 6th of one month to the 5th of the next. The monthly return must include payments made to subcontractors during that period and must reach HMRC by the 19th.
For example, a return covering payments from 6 May to 5 June is due by 19 June.
You should submit a return each month. If you made no payments to subcontractors, submit a nil return. If you know you will not make payments for up to 6 months, you can ask HMRC to make the scheme inactive for that period. You must start filing again when subcontractor payments resume.
Late returns can lead to penalties, even where no CIS tax was due.
When do I pay CIS deductions to HMRC?
CIS deductions are normally paid with the contractor's PAYE and National Insurance bill. Electronic payments are due by the 22nd after the end of the tax month, or by the 19th if paying by post.
For a transfer from a UK bank account, HMRC's current PAYE and CIS account details are:
- Account name: HMRC Cumbernauld.
- Sort code: 08-32-10.
- Account number: 12001039.
Use your 13-character Accounts Office reference without spaces. Different reference rules can apply to early or late payments, so always check how to pay CIS deductions to HMRC before paying.
How does a subcontractor claim CIS deductions suffered?
The method depends on how the subcontractor's business is set up.
Limited companies
A limited company normally reports its year-to-date CIS deductions suffered on an Employer Payment Summary through its payroll scheme. HMRC offsets the credit against the company's PAYE, National Insurance and any CIS deductions it owes as a contractor.
Unused credit can be carried forward to later PAYE periods in the same tax year. If credit remains after the end of the tax year, the company can make an online repayment claim. CIS deductions should not be claimed through the Corporation Tax return.
Sole traders and partners
A sole trader or partner normally reports gross CIS income and the CIS deductions suffered on their Self Assessment tax return. HMRC then offsets the deductions against their tax and National Insurance bill and repays any remaining credit.
In every case, keep the payment and deduction statements received from contractors and make sure the figures agree with the business records before making a claim.
Where can I find official guidance?
Use the latest HMRC guidance when checking a particular contract or payment:
- Construction Industry Scheme overview.
- What a CIS contractor must do.
- Detailed CIS guide for contractors and subcontractors.
- How subcontractors claim CIS deductions.
Need help with CIS?
CIS involves more than applying a percentage to an invoice. The scope of the contract, employment status, verification result, materials and filing dates all need to be checked.
If you would like help managing CIS or reviewing a payment, get in touch with us. You can also use our Payroll Helper to prepare CIS payment and deduction statements.