The CIS is a tax deduction scheme for the construction industry where many payments might be cash in hand. This has always caused concerns for HMRC which estimates that up to £3.5billion in tax is lost each year because these payments aren’t properly declared. Cash-in-hand is a legal form of payment, but it should be declared in full. 

 

If you’re a contractor the Scheme requires a percentage to be deducted from payments you make to subcontractors which you send directly to HMRC. 

 

If you’re a CIS-registered subcontractor then 20% of your payment will be deducted for tax purposes. If you’re not registered, 30% will be deducted. However, CIS isn’t applied to VAT or the cost of materials. 

 

If, as a subcontractor, you then subcontract some of your work to someone else you will become the contractor as far as CIS is concerned and you will have to make deductions too. 

 

In contrast, employees are covered by the pay as you earn (PAYE) system where tax is deducted at source. 

 

The CIS applies to all construction subcontractor payments that aren’t subject to employment contracts. 

 

Contractors include property developers and builders but the rules can also apply to non-construction businesses and public bodies that have spent an average of £1million or more on construction operations over the last three accounting periods. 

 

A subcontractor is someone who receives payments under a construction contract. However, it can become really complicated when a sub-contract covers non-construction work as well because the CIS tax deduction system applies to all payments. 

 

Subcontractors can have gross payment status which means contractors won’t make any deductions. The tax will still be due, but it will be paid at the end of the tax year along with National Insurance contributions (NICs). 

 

Gross payment status can help your cashflow, cover your day-to-day expenses, and reduce the risk of double taxation and the need to claim a tax rebate. However, your record-keeping will need to be really accurate so you can be sure you will have enough to pay your tax bill. 

 

To qualify for gross payment status your tax payments must be up to date and your turnover will be at least £30,000. If you’re a partnership or limited company, your turnover must be £30,000 per partner or director or at least £100,000 for the whole partnership or company. 

 

Subcontractors – if you’re a subcontractor and already registered as self-employed you can use your online self-assessment account on the government gateway to register for CIS. If you aren’t already registered online there’s an option to say you are a subcontractor when you register. 

 

Once you’re registered you can give your contractor your trading name and unique taxpayer reference (UTR) number so they can deduct the right amount of tax from your invoices. You will receive a payment and deduction certificate which is important for your tax records. You will also need to keep your receipts for materials. 

 

If you’re a sole trader you will need to complete your Self Assessment Tax (SAT) return at the end of the year showing the full amount of your invoices and the tax already deducted separately. 

 

Contractors – if you run a construction company and plan to use subcontractors you must be registered for CIS which you can do by completing an online form. You will need to be registered as an employer and contractor and decide whether to employ people or use subcontractors. 

 

Before paying your subcontractors, you must verify them using your own payroll software, HMRC’s online system, or over the phone. You can then confirm whether to deduct 20% or 30% from their invoice, record your payments each month, and provide your subcontractors with their payment and deduction certificate. 

 

You must declare monthly CIS deductions via a payroll scheme by the 19th of the following month. If you have gross payment status you will declare your full income on your corporation tax return. 

 

You can include your CIS payments with your usual PAYE and NI payments each month if you have employees. If not, you must make your CIS payments to HMRC by the 22nd of each month or risk penalties. You must keep a record of your payments to subcontractors for three years.