How Does CIS Work?

If you’re working in the construction industry in the UK, you’ve probably come across the Construction Industry Scheme - more commonly known as CIS. Understanding how CIS works is crucial if you are to stay compliant with HMRC, as well as to ensure you are paid properly and avoid unexpected tax problems.

At Contractwise, we have years of experience helping companies stay CIS compliant. This includes providing payroll audits that protect contractors and subcontractors and minimise the risk of damaging employee reclassifications.

In this article, we’ll break down everything you need to know about CIS, including how it works and how you can stay compliant.

Read on for more…

What is CIS?

The Construction Industry Scheme, CIS, was created by HMRC in the 1970s as a way to tackle tax evasion and improve compliance in the construction sector. It was created to ensure individuals and businesses in the industry pay the correct amount of tax and National Insurance, and all payments are as transparent as possible.

The scheme requires contractors to deduct money from a subcontractor’s payments and send it directly to HMRC. These deductions serve as advance payments towards the subcontractor's tax and National Insurance obligations. The goal is to prevent unpaid tax liabilities, which used to be commonplace in construction.

CIS applies to most construction work done in the country, including:

• Site preparation and clearance

• Demolition and dismantling

• Building work, alterations and repairs

• Decorating and finishing work

• Installation of systems

The scheme applies to both mainstream construction businesses as well as other companies that have spent more than £3 million on construction projects in the last year.

How does CIS work?

CIS is structured around the working relationship between contractors and subcontractors. The typical process follows these steps:

Registration

It is mandatory for all contractors to register with HMRC as a CIS contractor. Subcontractors can register too, but this is optional. However, it is highly recommended as it reduces the deduction rate from 30% to 20%.

Verification

Contractors are required to verify each subcontractor with HMRC before any payments are made. HMRC will then confirm whether the subcontractor is registered and will advise on the correct deduction rate.

Deductions

The deduction rate will depend on the status of the subcontractor. Registered subcontractors are deducted 20%, whereas unregistered ones are deducted 30%. In some instances, subcontractors can register for gross payment status. In these instances, no deductions are made, and subcontractors will pay their tax at the end of the tax year, like most self-employed people.

Monthly CIS returns

Each month, contractors must submit a monthly return to HMRC. This will detail:

• All subcontractor payments

• The deductions that have been made

• Any changes or new subcontractors

This return must be submitted even if no payments were made that month.

Payment and deduction statements

Contractors must provide each subcontractor with a written statement of the deductions for their records. These are essential for subcontractors when it comes to filing their taxes.

End of year filing

Subcontractors must file a self-assessment tax return to account for their income and deductions. Overpaid tax can be reclaimed as a refund.

CIS responsibilities for contractors

A contractor is categorised as a business or individual that hires subcontractors to perform construction work. They will typically be:

• Construction companies

• Property developers

• Local authorities

• Housing associations

• Businesses spending more than £3 million a year on construction work that hire workers

All contractors must:

• Register with HMRC as a contractor

• Verify subcontractors before paying them

• Deduct the correct tax amount from each payment

• Pay HMRC each month

• Submit monthly CIS returns

• Provide deduction statements to subcontractors

• Maintain accurate records of all CIS transactions

Contractors can register for CIS online via the HMRC website. They need a UTR (unique taxpayer reference), a national insurance number and other business documentation.

CIS responsibilities for subcontractors

A subcontractor is anyone who has been hired to do construction work. Usually, these people will be specialists in a certain field of construction and will be brought into a project to perform a certain role.

Common examples of subcontractors include:

• Plumbers

• Electricians

• Roofers

• Stone masons

• Contractors

• Plasterers

• And more

Subcontractors have several CIS responsibilities, including:

• Registering with CIS (not mandatory but recommended to get the lower deduction rate)

• Keeping all payment and deduction statements

• Filing self-assessment tax returns each year

• Tracking deductions to ensure you don’t overpay tax

• Claiming refunds if your tax deducted exceeds your tax bill

Registering for CIS as a subcontractor follows a similar process to that for contractors. You can do this via the HMRC website, but make sure you have your UTR, national insurance number and business details ready. If you’re someone who works as both a contractor and a subcontractor, you need to register twice and manage both roles separately under your CIS account.

How to make sure you’re CIS compliant

Staying compliant with CIS is essential to avoid penalties, reduce costly reclassification risks and make your tax as straightforward as possible.

Some key ways to ensure CIS compliance include:

• Stay registered and keep your information up-to-date: Whether a contractor or subcontractor, make sure you are properly registered and update your business details if they change.

• Verify subcontractors: If you’re a contractor, make sure subcontractors are verified through HMRC before paying them to ensure the correct deduction rate is always applied.

• Submit monthly returns on time: CIS returns are due by the 19th of each month. Missing deadlines will result in fines.

• Keep clear and accurate records: Store details of payments, deductions and subcontractor information.

• Use a CIS payroll company: The easiest way to stay compliant is to partner with a CIS payroll provider like Contractwise. Not only will we manage your payroll, but we will protect you from fines and costly employee reclassifications.

While CIS can seem complex at first glance, once you have an understanding of how it works, it gets easier. Whether you’re a contractor overseeing a large team or a subcontractor working for yourself, staying compliant with CIS keeps you protected.

For hassle-free compliance, consider partnering with Contractwise today. Simply contact our team for more information.