A Guide to CIS Returns

Managing payroll for any business can be a challenge, but within the construction industry it is a unique process.

This is because all construction firms also have the Construction Industry Scheme, otherwise known as CIS, to contend with. A key CIS requirement is submitting accurate and timely monthly returns to HMRC. For contractors, understanding and fulfilling CIS obligations is extremely important if compliance is to be maintained and penalties are to be avoided.

Here at Contractwise, we’re experts in all aspects of CIS and provide a wide range of services to our clients including payroll audits that protect contractors and subcontractors and avoid the costly risk of HMRC reclassification.

In this article, we’ll outline everything you need to know about CIS returns and explain how you can ensure you’re compliant.

Read on to find out more…

What is CIS?

Introduced in the 1970s, the Construction Industry Scheme is a UK government initiative that was created as a way to regulate tax payments in the construction sector. Traditionally, these payments were more opaque and tax was easier to avoid. Now, the scheme ensures that subcontractors’ taxes are deducted at source, which reduces the risk of tax evasion and ensures everyone is paid correctly.

As part of CIS, it is the contractor who is responsible for deducting tax from subcontractor payments and these deductions are then sent directly to HMRC. They also count toward the subcontractors income tax and National Insurance contributions.

CIS is required for most construction work in the UK including site preparation, demolition, repairs, decoration and more. With this in mind, it’s vital that contractors understand what they need to pay to ensure they are always compliant.

What are my CIS responsibilities?

Unlike subcontractors who can choose whether or not to be part of the Construction Industry Scheme, with contractors it is mandatory. Therefore, if you operate as a CIS contractor, HMRC imposes specific responsibilities that you must abide by in order to be compliant.

These include:

• Registering for CIS: All contractors must register for CIS with HMRC before hiring any subcontractors. This ensures they can meet their obligations under the scheme.

• Verifying subcontractors: All subcontractors need to be properly verified with HMRC this is to make sure their tax status is accurate.

• Deducting tax: Based on the subcontractor’s status you’ll either deduct 20% (for registered subcontractors) or 30% (for unregistered subcontractors) from their payments. Some subcontractors may qualify for gross payment status which means no deductions will be required.

• Filing monthly CIS returns: Contractors must submit a monthly CIS return that details payments to subcontractors and the deductions that have been made.

• Issuing payments and deduction statements: Contractors are required to provide their subcontractors with statements that show which deductions have been made from their payments.

• Paying HMRC: All deductions must be paid to HMRC by the 22nd of each month (or the 19th when paying by post).

If a contractor fails to meet any of these responsibilities, they may face harsh penalties and interest charges from HMRC.

Do I need to complete a monthly CIS return?

Yes, if you’re registered as a contractor under CIS then you must complete monthly returns. If you do not, then you will be met with costly fines.

If you’re wondering ‘what a CIS return is?’, it’s simply a form that needs to be completed each month that details the payments and deductions made to subcontractors.

Even if you haven’t made any payments to subcontractors during a particular month, or you exclusively work with gross payment subcontractors, these payments still need to be included in these monthly returns.

All monthly returns need to be submitted to HMRC by the 19th of each month following the reporting period. For example, a return for work done in November needs to be submitted by 19th December.

How to complete a CIS monthly return

While it may initially seem like a daunting process, completing a monthly CIS return is actually fairly straightforward if you know how.

Let’s break it down.

Gather the necessary information

Before submitting your CIS return you must ensure that you have all of your subcontractor’s details.

This includes:

• Name

• UTR

• Verification number

• Payment amounts

• Dates of payments

• Deductions made (if any)

Having all of this information to hand will make the process far easier.

Log into HMRC

Monthly returns are completed using HMRC’s online CIS service so you should begin by logging into your account. Some payroll softwares may allow you to file directly to HMRC.

Input the contractors details

Now, you’ll need to input details of your subcontractors that you gathered earlier. Remember, key information that is a necessity include:

• The amount paid before deductions

• The amount deducted (if applicable)

• The subcontractor’s verification number

Declare accuracy

The next step is to confirm that all the details you have submitted are accurate and your obligations have been met. This includes providing payment and deduction statements to your subcontractors.

Submit the return

Once all of the information has been entered, you can hit submit and the return will be complete. You need to ensure this is done before the 19th of each month, the CIS return deadline, to avoid any penalties.

Pay deductions to HMRC

You will then need to pay the deductions to HMRC by the 22nd of the month if paying electronically, or the 19th if paying via post.

While the process is fairly simple, many construction companies opt to use a professional company to handle their CIS tax affairs. At Contractwise, we offer a variety of services to ensure you are always fully compliant.

How to verify a subcontractor

One of the necessary steps when submitting a CIS return is providing HMRC with the subcontractor’s verification number.

This number shows that you have properly verified the subcontractor with HMRC and no returns can be submitted without it. Therefore, if you have never done this before or have recently brought a new subcontractor on board, you must ensure they have been properly verified ahead of the CIS return deadline.

Verifying subcontractors is a vital step in determining the correct tax reduction rate. The process is fairly simple and involves the following steps:

Gather the subcontractor’s information

Just like with CIS returns, certain information relating to your subcontractor is needed to verify them.

This includes:

• The subcontractor’s UTR

• A National Insurance Number (for sole traders) or a Company Registration Number (for limited companies)

Use HMRC’s CIS online services

Again, log into your HMRC account but this time you will need to navigate to the ‘verify subcontractors’ section.

Enter the subcontractor’s details

Input the subcontractor’s information to receive their verification status.

This status will be one of the following:

• Gross payment (no deductions)

• 20% deduction (for registered subcontractors)

• 30% deduction (for unregistered subcontractors)

Record the verification number

It’s important that you save your subcontractor’s verification number. HMRC will provide you with one for each subcontractor you work with and it’ll be required for your CIS returns so be sure to make a careful note of it.

For a more comprehensive look at how to verify subcontractors, check out our previous blog on the topic.

What’s the difference between a contractor and a subcontractor?

One of the biggest mistakes people make when handling CIS returns is mixing up contractors and subcontractors. While it might not seem like a big deal, even an honest mistake can be costly in the eyes of HMRC so it’s important to get it right first time.

A contractor is a business or individual that needs to pay the subcontractors for carrying out the construction work. It is their responsibility for verifying subcontractors, making deductions and submitting CIS returns.

Examples include construction companies that hire smaller firms or sole traders to complete specific tasks.

In contrast, a subcontractor is a business or individual who is hired to perform construction work. It is their responsibility for registering under CIS if they wish to do so, but unlike contractors it is not mandatory. However, they must provide contractors with accurate details that will be used for CIS returns. Unless they qualify for gross payment status, subcontractors will have deductions from their payments under the scheme.

Common examples of subcontractors include:

• Plumbers

• Carpenters

• Electricians

• Groundworkers

• Plasterers

• Stone masons

• Engineers

• And more

At Contractwise, we know that managing CIS returns can be tricky. But with errors leading to potential fines, it’s important you avoid common pitfalls such as:

• Failing to verify subcontractors

• Submitting returns late

• Reporting incorrect deductions

• Forgetting to issue statements to subcontractors

If managing CIS compliance seems overwhelming, then a specialist payroll company like Contractwise could be the perfect solution. We guarantee compliance and will be able to handle returns and other CIS procedures on your behalf. This allows you to focus on the running of your business with peace of mind that all your CIS obligations are fully taken care of.

Contact our expert team today to streamline your CIS returns and ensure complete compliance with HMRC.