Our tax preparation specialists tell you all about your responsibilities if you are a contractor under the Construction Industry Scheme (CIS)
At DSR Tax Refunds Ltd, we know that dealing with your responsibilities as a CIS contractor can be a tricky task. That’s why our experts want to help make life as easy as possible for you by sharing our specialist knowledge with you. So, whether you are wanting more information about VAT or need to know about charitable tax relief, our handy guides are here to help. All our information is based on HMRC sources, so you can rest assured that these guides are filled with helpful and accurate information.
What is a CIS Contractor?
If you work in the construction industry and do either of the following, you must register as a contractor under the Construction Industry Scheme (CIS):
- Pay subcontractors to do construction work
- Spend more than £1 million a year on construction (as a business) even if your business doesn’t actually do any construction work.
You could be a sole trader, in a partnership or own a limited company.
The CIS was introduced by HMRC in order to ensure full tax compliance in the construction industry. If the qualifying criteria apply to you, you must do the following:
- You need to register for CIS before you take on your first subcontractor.
- You need to check whether you can take them on as a subcontractor or whether you need to employ them as a full employee instead. If HMRC believe they are actually acting as an employee rather than a subcontractor, they may issue you with a penalty and your subcontractor may end up with a large tax bill.
- You must check that your subcontractor is also registered for CIS – you can check this with HMRC.
- When paying your subcontractors, you will need to make a deduction from their payments to cover tax. These deductions need to be paid to HMRC. They will be classed as advance payments towards the subcontractor’s tax bill.
- You will need to submit monthly returns to show the deductions and payments you have made. You will also need to keep full CIS records to show the payments and deductions you are making. HMRC could issue you with a penalty if you don’t.
- If there are any changes to your business, you must let HMRC know as soon as possible.
Who is covered by the CIS?
Most construction work is covered by the Construction Industry Scheme, including initial site preparations as well as refurbishments and painting and decorating services.
There are 2 types of contractors under the CIS – mainstream contractors and deemed contractors:
- Mainstream contractors: if your business is in construction and you pay subcontractors to perform construction work, HMRC classes you as a mainstream contractor. This includes builders and property developers as well as labour agencies and gangmasters.
- Deemed contractors: if your business doesn’t actually do any construction work but spends an average of more than £1 million per year in any 3 year period on construction work, it is classed by HMRC as a deemed contractor. This includes local authorities, government departments and housing associations.
Are there any exceptions to CIS?
Yes, CIS doesn’t apply in any of the following circumstances:
- Work that is paid for by a trust or charity.
- Work paid for by the governing body or head teacher of a maintained school on behalf of a local authority.
- Work on the subcontractor’s own property which is worth less than £1,000 (excluding materials) – you will need to call the CIS helpline on 0300 200 3210 to get an exemption in this instance.
If you are a deemed contractor, CIS doesn’t apply in the following circumstances:
- Work on property for your own business use, as long as that property is not for sale or rent.
- Work on a construction contract worth less than £1,000 (excluding materials) – you will need to call the CIS helpline on 0300 200 3210 to get an exemption in this instance.
Are there any construction jobs not covered by the CIS?
Some construction jobs are exempt from the scheme. The following types of jobs do not fall under the remit of the CIS:
- Scaffold hire where there is no labour involved.
- Provision of site facilities such as canteens or other facilities.
- Delivery of materials.
- Carpet fitting.
How do you register for the CIS?
If you need to register as a CIS contractor, you will need to register as an employer with HMRC. You can do this online. Once this has been completed, HMRC will write to you with the information required to start working as a CIS contractor. This is the process if you want to work as a CIS contractor and you are based in the UK. The process is slightly different if you are based abroad but want to do construction work in the UK, depending on whether you are a sole trader or partnership or a limited company.
If you have difficulties in registering, or need some help, you can call HMRC’s new employer helpline on 0300 200 3211 or the CIS helpline on 0300 200 3210. Both helpline are open between 8 am and 8pm, Mondays to Fridays, and 8am to 4pm on Saturdays. HMRC also provide a number of webinars to help you if you have any questions about the CIS registration process.
What does ‘verifying subcontractors mean?’
If you are acting as a CIS contractor, you are required to verify your subcontractors with HMRC before you pay them. This means that you check with HMRC, who tell you whether they are registered as a subcontractor under the CIS and if so, what rate of deductions you need to make on their pay. They might also inform you that you don’t need to make any deductions from their pay.
You still need to verify subcontractors, even if you have used them before, if you haven’t included them on a CIS return on the current tax year or previous 2 tax years.
How do you verify a subcontractor?
CIS subcontractors can be verified using the free HMRC online service. You can also use commercial CIS software if you are using that rather than the HMRC online service.
If you wish to verify a large number of subcontractors (more than 50) you will need to use commercial CIS software.
To verify a subcontractor, you will need the following information:
- Your UTR (unique taxpayer reference).
- Your HMRC employer reference.
- The reference number of your HMRC account office.
- Your subcontractor’s UTR.
- Your subcontractor’s National Insurance number if they are a sole trader. Temporary National Insurance numbers, which start with a ‘TN’ or 2 numbers, will not be accepted.
- Details of the subcontractor’s limited company, if this applies to them, including their company name, company registration number and company UTR.
- Details of their partnership, if this applies to them, including their trading name, partnerships UTR and nominated partner details.
How do you make deductions and pay subcontractors?
Under the CIS, a contractor is expected to make deductions on behalf of HMRC when they pay their subcontractors. How much you need to deduct will be decided by HMRC and they will tell you how much to deduct from their pay when you verify the subcontractor.
The CIS deduction rates are as follows:
- 20% for registered subcontractors
- 0% if the subcontractor has gross payment status – this means that the subcontractor is paid in full by the contractor and sorts their own tax and National Insurance out at the end of the tax year
- 30% for unregistered subcontractors
These deductions must be paid to HMRC as advance payments towards the subcontractor’s tax and National Insurance bill. It is your responsibility to pay these deductions to HMRC.
How do you make a CIS deductions?
It isn’t as simple as just deducting 20% or 30% from their pay. To make the correct deductions, you must follow the following process:
- Start with the gross amount of the subcontractor’s invoice – this is the total amount before any deductions.
- Take away any VAT the subcontractor has paid.
- Take away the cost of any materials the subcontractor has paid for, including any equipment which is now unusable (HMRC terms this ‘consumable stores’)
- Take away any fuel used (except for travelling)
- Take away the cost of any equipment the subcontractor has hired for the job – sometimes known as plant hire.
- From what is left, deduct the correct rate as notified to you by the HMRC (either 0%, 20% or 30%) – you will then be left with the net amount you need to pay the subcontractor.
How do you pay subcontractors?
Usually you would pay your subcontractors directly. However, if they request it, you can pay them through a third party – this might be a relative, a friend or workmate or might even be a debt company or someone they owe money to.
If you make any deductions on the subcontractor’s part, you must give the subcontractor a payment and deduction statement, which shows how much they have been paid and how much you have deducted on behalf of HMRC. They must receive this statement from you within 14 days of the end of each tax month – so if your tax month is 6th April to 5th May, you need to provide a statement to your subcontractor by 19th May.
If you know you won’t be making any payments to subcontractors for up to 6 months, you can ask HMRC for your scheme to be made inactive so that you won’t need to send any returns for that period. You can do this by logging on to your online CIS account. Once you start paying subcontractors again, you must file a CIS return.
How do you pay deductions to HMRC?
Once you have made a deduction from a subcontractors pay, you must pay that money to HMRC. When you register as a contractor, HMRC will set up a CIS payment scheme for you. If you are already registered as an employer under the PAYE scheme, HMRC will change your existing PAYE scheme to a PAYE/ CIS scheme.
You need to make one payment per month to cover your PAYE tax, National Insurance and CIS deductions.
You need to pay HMRC each month by the 22nd and you may be charged interest or penalties if you pay late. If you are paying by post, you need to pay by the 19th of each month. CIS deductions are paid to HMRC in the same way as PAYE and National Insurance payments are made.
What are monthly CIS returns?
Each month you have to tell HMRC about the payments you have made to subcontractors. You do this through your monthly CIS return. You can file your return using your online HMRC CIS service although if you prefer, there are also commercial CIS software packages you can use.
You need to declare that any subcontractors listed are not your employees. If you wrongly declare a subcontractors employment status, you could receive a penalty fine of up to £3,000.
If you make no payments to subcontractors in a particular month, you don’t have to file a return but you do need to inform HMRC that no payment is due.
If you use commercial CIS software, you cannot include any negative values so if you have any entries that come to less than zero, you should put a zero instead. HMRC might ask later for an explanation of any entries you have replaced.
The deadline for your return is the 19th of each month following the last tax month – so if you are filing a return for tax month 6th April to 5th May, you would need to file with HMRC by 19th May.
What are the penalties for late CIS returns?
Just like late Self Assessment tax returns and VAT returns, you will receive a penalty from HMRC if you file your CIS return late. If you inform HMRC that you didn’t pay any subcontractors that month it will cancel the penalty but it is better if you can notify them in advance.
The penalties are as follows:
|How late is the return?||Penalty|
|6 months||£300 or 5% of the CIS deductions on the return, whichever is higher|
|12 months||£300 or 5% of the CIS deductions on the return, whichever is higher|
If the return is any later than this, you may receive an additional penalty of up to £3,000 or 100% of any CIS deductions due on the return, whichever is the higher.
If you disagree with a penalty, you can appeal within 30 days of the date on the penalty notice. You can either appeal through the online CIS service or in writing to HMRC, quoting your UTR and the payment reference on the letter.
If you need to, you can correct or change your CIS return using the online CIS service. If you need any help to do this, you can call the CIS helpline on 0300 200 3210.
What records should you keep?
You are expected to keep accurate records of your payments and deductions as a CIS contractor. Under the CIS you must keep the following records:
- The gross amount of each payment invoiced by each of your subcontractors, excluding VAT
- Any deductions you have made from subcontractor payments
- The costs of any materials your subcontractors invoice you for, excluding VAT, if you make deductions for those subcontractors.
You need to keep these records for at least 3 years after the end of the tax year they refer to. HMRC can ask to see your CIS records at any time and can fine you up to £3,000 if you can’t produce your CIS records when asked to do so.
What changes must you inform HMRC of?
If any of the following changes occur, you must notify HMRC as soon as possible:
- You change address – either your business address or your home address
- You change your business structure – if, for example, you change from a sole trader or partnership to a limited company
- One of your subcontractors dies
- If you are a multiple contractor (if your company has a number of different divisions and you have requested multiple contractor status from HMRC) and you take on another contractor’s business. You will need to inform HMRC within 90 days.
- If you stop trading or using subcontractors – you will also stop filing monthly CIS reports. You must do this even if you have only stopped temporarily.
How can DSR Tax Refunds Ltd help?
We know that acting as a CIS contractor can be really hard work – there’s so much to consider and that’s before you start sorting out your deductions and CIS returns. Our friendly team of tax specialists at DSR Tax Refunds Ltd are on hand to help make life easier for you. We’re the experts at identifying your maximum allowable expenses so call us on 0330 122 9972 – we’re the tax experts you can trust.