What is the Construction Industry Scheme (CIS)?
The Construction Industry Tax Deduction Scheme is a scheme where contractors are required to withhold tax on certain payments made to subcontractors.
Why was the scheme devised?
Before we get any further, let's define some key terms which are all encompassed within the Construction Industry Scheme:
- Contractor: The legislation extends the term “contractor” to a wide range of businesses. A “contractor” is not solely restricted to “a person carrying on a business which includes construction operations”. A “contractor” will include businesses whose trade does not normally involve building or construction, but whose average annual expenditure on “construction operations” over a 3-year period exceeds £1 million. This means businesses like banks and supermarkets which spend more than £1 million a year may be treated as and deemed to be contractors.?
- Construction operations: Construction operations are also defined in the legislation. Construction operations include “construction, alteration, repair, extension, demolition or dismantling of buildings or structures whether permanent or not”. Details of further operations and exceptions can be found in greater detail in the tax legislation should you wish to explore in more detail.?
- Subcontractors: The legislation defines a subcontractor as someone who is is under a duty to the contractor to carry out the operations, or to furnish his own labour or the labour of others in carrying out the operations.
Tax treatment of payments
Payments by a contractor to a subcontractor will either be made gross or under deduction of tax. If tax is withheld by the contractor, it will either be withheld at:
- 20% if the subcontractor is registered with HMRC
- 30% if the subcontractor is not registered
- Under PAYE if the subcontractor is treated as an employee of the contractor
Payments by a contractor can be made gross if the subcontractor is “registered for gross payment”. Registration for gross payment will be granted by HMRC if certain conditions are met by the subcontractor. These are:
- The business test: There are two parts to fulfil this condition. The business must take place in the UK, which provides labour to carry out construction operations. The business must be, to a substantial extent, carried on by means of an account with a bank. Therefore businesses which are substantially “cash-based” will not satisfy the business test and will not be able to register for gross payment.
- The turnover test: A successful application for gross payment under this scheme can only be made if the business had a construction turnover of at least £30,000 in the 12 months before making the application.
- The compliance test: The subcontractor business must have kept all tax affairs up to date during the 12 months immediately before the application. This includes all tax payments including PAYE and tax returns paid and submitted ahead of the deadlines.
HMRC needs to be told about contracts entered between contractors and subcontractors so that they can check that payments are being correctly treated. An online verification service exists within HMRC which enables a contractor to verify with HMRC whether a subcontractor is registered for gross payment or whether tax should be withheld at source. Once HMRC has identified the subcontractor, HMRC will advise the contractor whether the subcontractor has registered. And, if so, whether payment should be made, either gross or net of tax at 20%. If the subcontractor has not registered, payments should either be made under deduction of tax at a flat rate of 30% or via payroll if the subcontractor is an employee.
There are two deduction rates:
- The 20% deduction rate: Subcontractors that are registered with HMRC, but are not registered for gross payment, will receive payment under deduction of tax at 20%. This is designed to equate to the average rate of tax suffered by a typical contractor. The deduction of tax is applied to the labour element of a subcontractor’s invoice such as any VAT additions. Where the invoice includes a profit element in respect of materials tax, must also be deducted from this profit element. Deduction of tax must also be made from any travelling expenses (including fuel costs) and subsistence paid to the subcontractor.
- The 30% deduction rate: This applies to subcontractors who are not registered under the scheme. This rate is intended to be an incentive for subcontractors to register with HMRC. This works exactly the same as the 20% deduction rate.
Returns of information and payment of tax
The contractor remits deductions of tax (at 20% and 30%) from subcontractors to HMRC on a monthly basis. Such remittances must be made 14 days from the end of the tax month — that is, by the 19th of each month. The payments must be made together with income tax and NIC under PAYE, where relevant. The contractor must also submit a monthly return — the form CIS300 — to HMRC no later than 14 days after the end of the tax month. The return will detail the amounts paid to subcontractors in the period, the amount of tax deducted (if any), and whether any materials were provided by the subcontractor. All returns must be filed electronically.
Late submission of returns and payment of deductions
A fixed penalty of £100 will apply where a return is filed late, with an additional fixed penalty of £200 if the return is outstanding more than two months after the filing date. If the return is more than six months late, a penalty of the greater of £300 or 5% of the deductions due for the return period will be levied. A further penalty of the greater of £300 or 5% of the deductions due will apply if the return is over 12 months late. The rules are very similar to the late filing and payment for a tax return due.
Subcontractor's tax position
Subcontractors will file annual personal tax or corporation tax returns at the end of the year in the usual way. If tax has been withheld at source – for example if the subcontractor is not registered for gross payment – this tax is treated as a payment on account of income tax and NIC for the year. Any balance of tax is paid under self-assessment in the usual way.
The “scheduled review”
Where a subcontractor is registered for gross payment, HMRC will review the subcontractor's compliance record once a year. This includes compliance as a contractor within CIS where the subcontractor is also a contractor. The automated review will check whether all required tax returns have been completed and returned, whether all information requested by HMRC has been supplied, and whether all tax due (including PAYE and NIC) has been paid by the due dates. If the review is failed then the gross payment status is withdrawn by HMRC.
What can I expense?
Being self-employed, you likely need to buy your own equipment, tools, and uniform. All of this and more can be expensed through your Self Assessment tax return. These expenses will be deducted from your earnings, and you only pay tax on the profits.
- Tools, such as drills
- Uniform, such as helmets and high-visibility clothing
- Mileage, which is often overlooked and you can claim *up to 45p per mile*
- Insurance, such as your car, van, and tools insurance
- Marketing, such as advertisement
- Travel costs, such as parking, and train and bus tickets
- Accounting fees, such as the £50 Taxd fee!
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