What Is CIS Tax and How Does It Work?

The Construction Industry Scheme (CIS) is a tax deduction program specifically designed for the construction sector. This scheme helps Her Majesty’s Revenue and Customs (HMRC) collect income tax from contractors and subcontractors. Its primary purpose is to ensure that tax is deducted at source from payments made by contractors to their subcontractors.

Key Concepts of the Construction Industry Scheme

The CIS aims to reduce tax evasion within the construction industry by regulating payments between businesses. HMRC defines a “contractor” as a business that pays subcontractors for construction work, or a business not primarily involved in construction that has spent more than £3 million on construction operations within any rolling 12-month period since its first payment for such work.

Conversely, a “subcontractor” is an individual, sole trader, partnership, or company performing construction work for a contractor. These entities are subject to deductions under the scheme unless they qualify for an exemption. The scope of work covered by CIS is broad, encompassing most construction, alteration, or repair activities related to buildings or civil engineering structures.

Specific examples of covered work include site preparation, demolition, building, alterations, repairs, and decorating. It also extends to installing systems for heating, lighting, ventilation, power, water, and drainage, as well as cleaning the inside of buildings after construction work. However, certain activities are generally excluded, such as architectural and surveying work, scaffolding hire without labor, carpet fitting, or the delivery of materials.

Operating CIS Deductions

Before making payments, contractors must verify a subcontractor’s CIS status with HMRC. This verification determines the correct deduction rate to apply. There are three main deduction rates under CIS: 20% for subcontractors registered with HMRC, 30% for unregistered subcontractors, and 0% for those with “gross payment status”.

Subcontractors can achieve gross payment status, allowing them to receive payments without deductions, if they meet specific criteria, including a good tax compliance record, sufficient turnover, and passing a business test. When calculating the deduction, the contractor subtracts the CIS percentage from the subcontractor’s payment, excluding VAT and the cost of materials. The contractor then pays the net amount to the subcontractor.

Contractors typically pay the deducted amounts to HMRC as part of their monthly Pay As You Earn (PAYE) and National Insurance contributions. These payments are due within 14 days of the tax month end, or 17 days if paying electronically. Subcontractors can then offset the deducted tax against their own tax and National Insurance liabilities when they complete their self-assessment tax return or company tax return.

CIS Registration and Compliance

Contractors are legally obligated to register for CIS with HMRC if they pay subcontractors for construction work or meet the £3 million expenditure threshold. To register, both contractors and subcontractors typically need their Unique Taxpayer Reference (UTR), National Insurance number, business name, and address. Registration can be completed online through the HMRC website or by phone. Subcontractors are not required to register for CIS, but doing so means their payments will be subject to a 20% deduction instead of 30%.

Contractors must submit monthly CIS returns (CIS 300) to HMRC, even if no payments were made to subcontractors in a given month. These returns require details such as subcontractor names, gross payments made, and the amount of tax deducted. The deadline for submitting monthly returns is the 19th of each month following the tax month. Failing to submit these returns on time can result in penalties.

Contractors also have an obligation to provide a payment and deduction statement to each subcontractor within 14 days of the end of each tax month. This statement must detail the gross payment, any deductions made, and the cost of materials. Maintaining accurate records of all CIS payments and deductions is also required for at least three years after the end of the tax year.