Construction Industry Scheme (CIS): the comprehensive guide
The Construction Industry Scheme (CIS) is a set of rules that apply to contractors and subcontractors who work in the construction industry. The CIS scheme is designed to ensure that the correct amount of tax is deducted from workers’ pay and then paid to HM Revenue & Customs (HMRC).
If you’re new to the construction industry or are thinking of hiring someone to work on your project, it’s important to understand how CIS works. This guide will explain everything you need to know, from what CIS is and how it operates, to how you can ensure you’re compliant with the scheme.
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a set of rules that contractors and subcontractors in the construction industry must follow. The scheme is designed to ensure that workers are paid fairly and on time and that taxes are properly deducted and paid to HM Revenue & Customs (HMRC).
If you work in the construction industry, it’s important to understand how the CIS works and what your rights and responsibilities are. In this guide, we’ll cover everything you need to know about the scheme, including who needs to register, how payments are made, and what happens if something goes wrong.
What is the point of the construction industry scheme?
The construction industry scheme is designed to ensure that all contractors and subcontractors are paid fairly for their work and that they pay the correct tax on their income. The scheme has been in operation since 1957, and it is currently overseen by HM Revenue & Customs (HMRC). The CIS is a voluntary scheme, but all contractors and subcontractors who wish to work within the construction industry must comply with its rules.
The main aim of the CIS is to ensure that all contractors and subcontractors are paid fair rates for the work they do. It also ensures that the correct amount of tax is paid on their income. The scheme protects both workers and HMRC by ensuring that everyone pays their fair share. The CIS can be a complex area, but this guide will explain everything you need to know about the scheme. We’ll cover topics such as registration, tax deductions, payments, invoicing, and more.
What work is covered?
The CIS covers a wide range of construction work, from small renovation projects to large-scale commercial developments. All work that falls under the definition of ‘construction’ is covered by the scheme. This includes work on new build properties, as well as alterations, repairs, and maintenance work on existing buildings.
Under the CIS, contractors are responsible for deducting money from subcontractors’ payments and passing this on to HMRC. Subcontractors must then declare their income and pay any tax due through their annual self-assessment tax return. If you’re thinking of carrying out any construction work, it’s important to check whether the CIS applies to you. In most cases, if you’re hiring a contractor or subcontractor to carry out work for you, they will be required to operate under the scheme.
The CIS covers a wide range of work, including:
- Building work
- Demolition work
- Electrical work
- Glazing work
- Plumbing work
- Roofing work
**Accurox is an accountant for construction companies, and if you need it, our firm can help you with everything CIS-related.
Who is eligible for CIS?
The Construction Industry Scheme (CIS) is a set of rules that govern how contractors and subcontractors must deduct money from a worker’s pay and pass it on to HM Revenue & Customs (HMRC).
The scheme is designed to ensure that workers in the construction industry are taxed correctly and to prevent fraudulent claims.
To be eligible for CIS, a worker must:
- be working in the UK construction industry
- be aged 16 or over
- be employed by a contractor or subcontractor who is registered with HMRC for CIS
- have their wages paid into a UK bank or building society account
If you satisfy all of the above criteria, your employer will deduct money from your wages before they are paid into your bank account. This money will then be passed on to HMRC.
Who is exempt from the CIS scheme?
If you work in the construction industry, you’ll likely be aware of the Construction Industry Scheme (CIS). The scheme is designed to ensure that contractors deduct money from a subcontractor’s pay for the tax.
However, there are some exceptions to the rule. If you’re self-employed, you’re not subject to the CIS scheme. This includes if you’re a sole trader or in a partnership. You’re also exempt if you’re employed by a construction company but not working on construction projects.
Additionally, certain types of payments are not subject to CIS deductions. This includes if you’re paid for materials only or if you’re an employee of a contractor who is not registered for CIS. If you have any questions about whether or not you’re exempt from the scheme, it’s best to speak to your accountant or the HMRC.
CIS for Subcontractors
If you’re a subcontractor working in the construction industry, it’s important to understand how the CIS works and how it affects your payments. In this blog post, we’ll give you a comprehensive guide to the CIS, including what it is, who it applies to, and how it can impact your business.
1. VAT and Self-Billing
It’s a good idea to talk through your annual accounts with your accountant, so you can see how the profit figures relate to cash flow. This will allow you to plan ahead and ensure that you’re able to pay tax bills on time. It also gives you the opportunity to discuss any financial challenges you may be facing, which can help you work out a strategic plan based on specific goals.
2. Keep good records of job costs and invoices
As a construction business owner, it’s always important to keep accurate records of job costs and invoices so that goods are accounted for properly, and jobs are billed correctly. This is just as important at the end of the year as at any other time! The more accurate information your accountant has access to, the easier it is for them to prepare your accounts – which in turn will save time (and money).
3. Stay up-to-date with tax changes throughout the year
Tax rules change frequently, and it’s easy for business owners – particularly small business owners – to miss something that could be important. By staying on top of changes throughout the year, you can ensure that your business is up-to-date – and that there aren’t any nasty surprises at the end of the financial year.
4. Manage your cash flow effectively
Many businesses don’t realize how important it is to maintain good records of their cash flow, but this information is crucial in ensuring that your construction company remains solvent from month to month. Having access to an accurate record of your cash flow allows you to plan ahead and stay on top of payments, so you can avoid late payment fees and interest charges. This will make it easier for you to manage your finances effectively and keep control over your business accounts.
5. Track bookkeeping costs against job estimates
One of the most important things to do at the end of each financial year is to review job estimates against actual bookkeeping costs, so you can identify where improvements can be made in future years. This information can help you to improve both your internal processes and external communications with clients so that you are able to provide more accurate quotes in the future – which should result in fewer cost overruns.
It’s also a good way of spotting areas where you could be making more profit – and it can help you to negotiate better terms with suppliers.
6. Check your stock levels
If you’re a construction company that holds stock, it’s important to check your levels at the end of the year so that you can ensure that inventory is accounted for properly in your annual accounts. This will also allow you to identify any areas where stock levels may be too high or low so that you can make adjustments as necessary.
It’s a good idea to keep an eye on inventory throughout the year, but doing a thorough check at the end of the financial year ensures accuracy in your final accounts.
7. Review expenses and claims for tax relief
At the end of each financial year, it’s important to review your business expenses to ensure that all eligible costs are being claimed for tax relief – and that there are no discrepancies in your records. It’s also a good idea to compare this information with previous years, so you can identify any areas where costs have increased or decreased significantly, which might signal a change in business circumstances or indicate an opportunity for cost savings.
If you spot any discrepancies in your records, it’s a good idea to speak to your accountant, as they may be able to help you resolve the issue.
8. Invest in cloud software for your construction business
Now is the time if you’re not already using a cloud software solution for your construction business! By moving your records and accounting processes online, you can make it easier for yourself and your accountant during the end-of-year accounts preparation process.
Cloud accounting software allows you to manage all aspects of your finances from one centralised location and gives you access to real-time financial data (which is useful at any time of year!). It also makes it easy to share information with your accountant or bookkeeper so that they can access the information they need without having to chase it up.
Upgrading to a cloud platform will save you time and money in the long run – so it’s definitely worth considering if you haven’t already made a move.
9. Pay attention to deadlines
As a small business owner, there are a lot of deadlines that need to be met throughout the financial year. This can be hard enough at other times – but when you add in Christmas closures, bank holidays, and extended leave periods, things become even more difficult.
Make sure you have a list of all the deadlines that need to be met and put them in your calendar (ideally, with reminders). This will help to ensure that nothing gets missed or forgotten about – which can save you time and money both now and in the future.
10. Plan ahead for next year
The end of the financial year is a good time to start thinking about your plans for the next 12 months. What do you want to achieve? What do you want your business to look like? What changes do you need to make?
By taking some time now to think about your plans for the future, you can ensure that your business is on track to meet its goals – and that the end of next year’s financial year isn’t quite so stressful!
The Process of Registering for CIS
Subcontractors can also register with HMRC, which will allow them to receive payments directly from HMRC rather than through their contractors. In order to register, subcontractors must provide their name, address, contact details, and National Insurance number.
Once both the contractor and subcontractor are registered with HMRC, the contractor will need to deduct money from the subcontractor’s payments and pay it to HMRC. The amount that is deducted depends on the subcontractor’s tax status: 20% for basic-rate taxpayers and 30% for higher-rate taxpayers. The contractor will then send a monthly return to HMRC detailing the payments made to subcontractors and the amount of tax deducted.
Subcontractors can check that the deductions have been made correctly by logging into their personal tax account on the HMRC website.
Tax and National Insurance When Working Through CIS
As a result of the CIS, those who work in construction are able to claim back some of the tax that they have paid. This is because the CIS operates on a system of gross payment rather than a net payment. So, if you are paid through the CIS, you will receive your gross pay minus a deduction for income tax and National Insurance.
The amount of tax and National Insurance that you can claim back depends on your individual circumstances. However, it is worth bearing in mind that you can only claim back tax if you are registered with HMRC as self-employed. If you are an employee of a company, then you will not be able to make a claim for tax relief through the CIS.
In terms of National Insurance, you will be able to claim back up to 12% of your contributions. This is because National Insurance is calculated at a rate of 12% on earnings between £8,632 and £50,000 per year. So, if you earn £50,000 per year and are paid through the CIS, you will be able to claim back up to £6,000 in National Insurance contributions.
It is also worth noting that you can only claim back tax and National Insurance contributions if you have paid them in the first place. So, if you are paid less than £8,632 per year, you will not have paid any National Insurance and so will not be able to claim it back. Similarly, if you pay tax at the basic rate of 20%, you will not be able to claim back any tax through the CIS as you have not paid enough to reach the 40% threshold.
How much tax do you pay CIS?
The short answer is that you pay a 20% tax on all construction work carried out through the CIS, but there are a few important exceptions to this rule.
Firstly, if you’re registered as self-employed with HMRC, then you can claim back any tax deducted from your payments by completing a Self-Assessment tax return at the end of the year.
Secondly, if you’re employed by a construction company that’s registered with the CIS, then your employer will deduct your tax before paying you and will also account for it to HMRC. You won’t need to do anything further.
If you’re employed, and your employer isn’t registered with the CIS, then they’ll still deduct 20% tax from your payments, but it’s up to you to account for this to HMRC when you complete your Self-Assessment.
The final exception is if you’re employed by a non-construction company and carrying out construction work as part of your job (for example, if you’re a plumber working for a non-construction company). In this case, your employer won’t deduct any tax from your payments, and it will be up to you to account for it to HMRC.
Do I have to pay through CIS?
If you’re a contractor, you may wonder if you must pay Construction Industry Scheme (CIS) tax. The answer is that it depends on the type of work you’re doing. If you’re working on construction projects that are worth more than £1,000 (excluding VAT), then you will likely have to pay CIS tax.
As a subcontractor, you’ll also have to pay CIS tax if the contractor you’re working for is registered with HMRC. In this case, the contractor will deduct money from your payments and pass it on to HMRC.
If you’re self-employed, you don’t have to pay CIS tax. However, if you hire someone to work for you, they will need to pay CIS tax. If you have any questions about whether or not you need to pay CIS tax, you should speak to an accountant or tax specialist. They will be able to advise you on your specific situation.
Record Keeping for CIS
You need to keep records so HMRC can check you’re paying the right amount of tax. In addition, you must keep records for at least three years from the end of the tax year they cover. HMRC may ask to see your records at any time. If you do not have records or cannot find them, HMRC may charge you a penalty.
There is no specific record-keeping requirement for CIS, but as a minimum, you should keep copies of invoices and bank statements. If you use accounting software, this will help you to keep track of your income and expenditure. You can also get software specifically designed for CIS record keeping.
What are the benefits of CIS?
The Construction Industry Scheme (CIS) is designed to ensure that subcontractors are paid promptly and in full for the work they carry out. If you need it, our firm can help you with everything CIS-related.
There are a number of CIS benefits for both contractors and subcontractors:
CIS ensures that subcontractors are paid promptly for the work they carry out. This can help to improve cash flow and reduce financial pressure on businesses.
The scheme requires less paperwork than traditional methods of payments, making it quicker and easier to administer.
CIS provides greater security for subcontractors as payments are made directly into their bank accounts rather than through an intermediary. This reduces the risk of non-payment or delayed payment.
Flexible payment options
Contractors can choose to make weekly or monthly payments to suit their needs. This flexibility can help to improve cash flow management.
What happens if I don’t deduct CIS?
If you’re a contractor and you don’t deduct CIS from your subcontractors, you could be liable for the full amount of tax and National Insurance due. This could mean having to pay a hefty fine, as well as any backdated taxes.
In addition, if you’re found to have deliberately not deducted CIS, you could be prosecuted and face an unlimited fine. So, it’s definitely not worth taking the risk of not deducting CIS. Make sure you’re fully compliant with the scheme, and if you’re unsure about anything, get advice from HMRC or a professional accountant.
Need help with CIS?
The Construction Industry Scheme (CIS) is designed to protect workers in the construction industry by ensuring they are paid properly and on time and also includes provisions for health and safety. If you work in the construction industry, it’s important to familiarise yourself with the CIS to ensure you’re compliant with the law. This guide should have given you a good overview of the scheme and what it entails, but if you need further advice, please reach out. We can help you with registering for the scheme, keeping monthly CIS records and filing monthly returns liaising with HMRC, and making decisions about employment vs subcontracting.