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What The Construction Industry Scheme Means For Contractors & Subcontractors

construction industry scheme guide

The construction industry scheme (CIS) is a tax system in the UK that sets out and governs how contractors and subcontractors working in the construction industry handle tax payments and deductions.

For contractors, this covers the registration of subcontractors, deducting the correct amount of money from subcontractors pay following written permission, and submitting CIS returns to HMRC.

For subcontractors, this means they need to be registered by contractors with HMRC and have a unique tax reference, have deductions made from their payments by contractors, keep accurate records of payments and expenses to claim allowances and they will be subject to penalties if they fail to register properly with HMRC.

Overall the scheme intends to ensure that construction workers are paying the right amount of tax.

Read on for more information about the Construction Industry Scheme, including how it works and how it applies to different contractors and subcontractors. We will also look into tax payments as it pertains to the construction industry.

What is the Construction Industry Scheme?

The Construction Industry Scheme or CIS is specifically for those working in the construction industry in the United Kingdom. The scheme came out in 1994 to ensure that contractors and subcontractors pay the right amount of taxes if they are working in construction. CIS covers any construction work, whether it be building, demolition or civil engineering.

Provisions differ between contractors and subcontractors. Subcontractors must be registered by their contractors with HMRC. Additionally, contractors must make deductions for HMRC and submit it accordingly together with the subcontractors’ monthly returns. They must also set off these amounts against income taxes owed, if any.

How are Contractors and Subcontractors Defined Under the Scheme?

The Construction Industry Scheme differentiates between contractors and subcontractors. Contractors are those individuals or businesses that work in the construction industry while subcontractors are the ones who provide services to these contractors.

Contractors have the legal obligation to register all their subcontractors with HMRC. Furthermore, they are tasked with deducting any pays due to HMRC. They must file these deducted amounts in the monthly returns. On the other hand, subcontractors have the responsibility of setting the deduction amounts off their income tax payable. This way, they would not have to pay more tax than what is necessary.

What Types of Work Does the Scheme Cover?

The CIS rules apply to all construction work, which includes building, demolition and civil engineering works. The scheme also applies to home and office refurbishments. If you are unsure if your work or upcoming project is covered by the Scheme, you must clarify it with HMRC.

How Do Contractors Register Their Subcontractors with HMRC?

Contractors can submit subcontractor registrations online via HMRC website. They can also register their subcontractors by phone or post. Once they have successfully registered a subcontractor, a reference number will be generated. Contractors must use this reference number when applying pay deductions from that particular subcontractor’s pay.

This is important to ensure that the deductions are reflected on the right subcontractor’s account. Otherwise, your subcontractor would be making overpayments on their taxes due and deductions made would not be reflected accurately.

How Do Contractors Make Deductions from Subcontractors’ Pay?

It is the contractor’s responsibility to notify HMRC about deductions made from subcontractor payments. These amounts must be declared in their monthly returns. Tax authorities refer to these for tax calculation purposes and rely on these filings to properly compute tax amounts net of deductions that have been made on subcontractor pays.

What Should be Included in Monthly Returns?

It is important for contractors to include all necessary data in the filing of their monthly returns. Contractors must provide complete and correct name and address details for every subcontractor. They must also include the total amounts of payments made to every subcontractor.

Most importantly, they must include the total amount deducted from every subcontractor. Providing complete and accurate information will enable the Construction Industry Scheme to operate correctly.

Contractors must keep accurate and updated records of payments for every subcontractor. Deduction amounts must also be updated.Keep information current and correct at all times to avoid any problems with the scheme and to ensure that your records are error-free.

How Do Subcontractors Set Off Deductions?

Noone wants to overpay in tax payments. That is why subcontractors must set off any deductions already made from their pay against their taxes due. As a subcontractor, you can avoid paying more than you have to by declaring deductions in your annual income tax returns. If you sense that your deduction amounts are understated, you should contact HMRC to review and correct errors made on your records.

Who is Exempt from the Scheme?

There are exemptions to the scheme. Not all workers are under CIS. Some businesses do not apply, such as:

  • Any business that exclusively employs family members
  • Any business that performs construction work solely for domestic customers
  • Any business with less than £30,000 of annual turnover
  • Any self-employed individual who reports under £12,500 of annual income 

If you are in construction but unsure if your business is exempted from CIS, you should confirm your status with HMRC to avoid any mistakes on deductions and taxes.

Other Entities Who May Be Deemed Contractors

According to the Construction Industry Scheme, the following entities are regarded as contractors:

  • Any business doing construction works for local authorities and for the government
  • Any business which has registered under the Health and Safety Executive
  • Any business which is registered under the Environment Agency

How to Get Out of the Scheme

There are only two ways to get out of the Construction Industry Scheme. One way is to apply for exemption. If your work or business meets the conditions, you will be granted an exemption. The second route is to leave the construction industry. If you are unable to abide by CIS, then construction isn’t the sector for you.

What is a CIS Suffered Report?

A Construction Industry Scheme Suffered Report calculates all tax payments made by a subcontractor. The Suffered Report factors in the deductions made from the subcontractor’s pays. It also includes entitlements or reliefs on account of the subcontractor. CIS Suffered Reports help subcontractors avoid overpayment of taxes. These reports are issued and compiled by HMRC and can be accessed via their website.

Subcontractors should refer to the report to check their remaining tax due net of the total deductions taken from their pay. The report also helps check deduction amounts to see if they have been overcharged.

Subcontractors must keep copies of their CIS Suffered Reports as the documents will help them keep tabs on amounts being deducted from their pay. This makes it easy for them to file their tax returns and pay the right amount of tax accordingly.

What Happens if a Subcontractor Doesn’t Register

Subcontractors who do not register with HMRC lose out on several benefits. First, they can’t make claims or receive reliefs and allowances due including the Construction Industry Scheme allowance. Second, they will pay more taxes than what is due. Third, they can’t set off deductions on their pay against their tax liabilities. Therefore, if you are a subcontractor,it is best for you to promptly register with HMRC.

How do Subcontractors Register with HMRC?

It is easy to register with HMRC as a subcontractor, simply complete a self-assessment tax return or contact HMRC. Once you are registered as a subcontracted, you will receive your own unique tax reference number. Give this to your contractor so he can identify you accordingly when making deductions and filing those deductions from your pay with HMRC.

What Happens if a Subcontractor Stops Carrying Out Work?

If you stop doing construction work as a subcontractor, then you won’t have income tax liability anymore. Additionally, you won’t be eligible for claims, reliefs and allowances that are entitled to subcontractors working in the construction industry. You will need to pay any outstanding National Insurance contributions.

What is the Construction Industry Scheme Allowance?

The CIS or Construction Industry scheme allowance refers to deduction amounts taken from every subcontractor’s pay. CIS allowances cover material costs and costs of tools and other equipment which subcontracts utilise in construction work. CIS allowances also cover transportation costs to and from construction sites.

Subcontractors can make a claim by presenting evidence of expenses incurred in the performance of their work duties. Hence, it is important to keep your receipts at all times so you can claim and set off CIS allowances against your income tax obligations.

What if Subcontractors are Incorrectly Paid By Mistake?

For overpayments, the subcontractor can file a claim with HMRC. Once proof of overpayment has been provided, HMRC will refund any overpayments made. So if you feel that there’s an error with your pay, contact HMRC and present your evidence to get a refund.

If subcontractors are underpaid, they must contact their contractors first and request the remaining amount due. Should any contractor refuse to pay the amount due, the affected party can take legal action to claim any amounts that are outstanding.

Subcontractors must keep copies of all payments given to them so they can easily make claims and present evidence of underpayments and or overpayments to HMRC.

Does CIS Apply to Employees?

The Construction Industry Scheme only applies to contractors and subcontractors. Employees are already subject to Pay As You Earn or PAYE meaning employees do not need to register with HMRC or file any tax returns with HMRC unless they have additional income outside of their main employment that needs to be declared.

Employees don’t have to deal with tax payments and National Insurance contributions. With the PAYE system, all National Insurance contributions and any taxes due are deducted from employee’s pays.

According to HMRC, any construction industry worker that receives their pay under PAYE is considered as a construction industry employee. This classification includes those employed by contractors and subcontractors as well as self-employed parties that get taxed under PAYE.

The employer is responsible for deducting correct tax amounts and National Insurance contributions from their pays. Employees who are not sure about the amount of tax they should pay may contact HMRC for more information.

What Trades are Excluded from CIS?

Certain trades are excluded from CIS. Exempted trades include roofing, plumbing, drain laying and gasfitting.

Those who work on the construction site but do not perform work tasks in the construction itself are also excluded from CIS. This applies to those who operate or work in a food business that is situated on the construction site. Security workers are also excluded from CIS.

These types of workers may register with HMRC but get taxed under PAYE. However, they are not eligible for claims on allowances and reliefs which apply to construction workers under CIS.

How Has CIS Changed?

Since CIS has been introduced, there have been changes made to the scheme. The Construction Industry Scheme was last changed in April 2014. At the time, the change focused around rules on deductions from subcontractor payments.

In the past, a subcontractor’s pay can be subjected to a 30% maximum deduction without their consent. This means that contractors could cause their subcontractors to pay more tax than what was necessary.

Since April 2014, contractors now need a written permission from their subcontractors before they can deduct any amount from subcontractor payments. Permission must be granted before commencing any construction work. Additionally, subcontractors have the option to withdraw their consent at any given time.

Furthermore, subcontractors must receive a statement of account each month. Their contractors must provide information on all deductions that have been taken from their pay.

Thus, all changes put in place made the Construction Industry Scheme a fairer arrangement for subcontractors, helping them better manage and monitor their tax obligations and corresponding payments.

Final Thoughts

As we have learned in this article, the Construction Industry Scheme is of significant importance to those working in construction in the UK. The rules aim to administer a fair taxation, deduction and payment system between contractors and subcontractors.

CIS ensures that both parties pay the right amount of tax and that contractors make appropriate deductions from their subcontractor’s pays. Subcontractors must fully understand what the Construction Industry Scheme is to prevent problems during taxation time and to protect themselves from overpaying tax.

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