Construction Industry Scheme

20 Mar 2024

What is CIS Registration?

Everyone who works within the construction industry needs to be aware of the Construction Industry Scheme, otherwise known as CIS.

A government designed scheme that was created to make payroll and taxation of construction services easier, its essential contractors and subcontractors have a thorough understanding of CIS and the other taxation rules that relate to the sector.

At Contractwise, we’re experts in HMRC legislation and the Construction Industry Scheme. We regularly help businesses ensure they’re compliant and remove the risk of your subcontractors being reclassified as employees - which comes with costly penalties and large fines.

In this article, we’ll answer the question ‘what is CIS registration?’ outlining everything you need to know about the scheme and how you can register for it.

Read on to find out more.

What is the Construction Industry Scheme?

Before we delve into CIS registration, let’s take a look at exactly what the scheme is.

Initially, the Construction Industry Scheme was formed in 1971 and was designed as a way to make taxation within the construction industry easier while also clamping down on illegal tax avoidance and evasion. In particular, the scheme focuses on the payment of contractors and subcontractors.

In the past, the payment of these people was less transparent than it is now which made tax avoidance far easier.

Now, it’s a legal requirement for those in the industry to be CIS compliant.

CIS is a mandatory taxation system that has been created specifically for the construction industry. Every construction contractor has to register for the scheme by law, and it is optional for subcontractors. Once construction has been completed, registered subcontractors will see 20% of their earnings automatically deducted. This will be used for the tax they need to pay, meaning the subcontractors do not have to worry about this at a later date as the process has already been taken care of. If a subcontractor chooses not to register, however, 30% is deducted so it is always worth registering as it can save people up to 10% of their earnings. In some cases, subcontractors may be able to apply for gross pay which means nothing will be deducted by the scheme. Instead, subcontractors will file their taxes like most other self-employed individuals and pay their owed tax at a later date.

In 2007, significant changes were made to the scheme and the rules that were introduced remain the same today. As mentioned above, it’s vital that contractors register for the scheme as part of their payroll process.

What are the benefits of CIS?

The Construction Industry Scheme (CIS) here in the UK provides a whole host of benefits to both contractors and subcontractors. Some of the key benefits include:

  • Improved cash flow - Due to the fact that contractors make an automatic 20% deduction from the invoice of a subcontractor, it helps with cash flow. This is because subcontractors who are not registered for the scheme will see 30% of their earnings deducted, meaning they lose 10% more than they would if they used CIS.

  • Spread the cost of tax and National Insurance - For subcontractors that are working for contractors, these CIS deductions will contribute towards your annual tax and National Insurance bill. With these deductions being spread across a larger and more frequent period, this means that by the end of the year, there will be no unexpected, and unpleasant, tax bill surprises.

  • Reduced tax evasion - The Construction Industry Scheme helps to reduce tax evasion throughout the construction industry by making it mandatory for contractors to deduct money from their subcontractors' payments and pass it directly to HM Revenue and Customs (HMRC). This ensures that subcontractors are always paying their taxes correctly and the risk of tax evasion is reduced.

  • Simplified tax compliance - For subcontractors, the CIS system simplifies the process of paying taxes as tax deductions are made at the source by contractors. This helps subcontractors to budget more effectively and potentially avoid tax liabilities at the end of the financial year.

  • Regular income reporting - The Construction Industry Scheme requires contractors to diligently report payments made to subcontractors to HMRC on a monthly basis. This then helps HMRC to keep track of payments made within the construction industry, ensuring taxes are always paid accurately and on time.

Overall, the Construction Industry Scheme provides a framework for ensuring tax compliance, promoting transparency and reducing tax evasion within the construction industry, benefiting both contractors and subcontractors alike.

What is CIS registration?

CIS registration is simply the process that all contractors need to go through to register themselves with HMRC as part of the Construction Industry Scheme system.

The process is fairly straightforward and can be done online on the government’s website. If you’re a contractor, it is a legal requirement to register for CIS and if you don’t then you could face severe financial penalties and hefty fines.

On the HMRC website, you can set up an account as a new employer. Once you have registered, you will be provided with an employer PAYE reference number.

Once your account has been set up, you will need to be absolutely certain that the subcontractors you’re using are, in fact, subcontractors and not employees. If you wrongly register employees as subcontractors, HMRC will reclassify them and you will face a fine.

Once you have registered, you can then add subcontractors to the account using the software provided by HMRC. This software will also offer guidance on whether someone is a subcontractor or not.

Following the verification of your subcontractors, you will then be responsible for deducting money from their pay for tax and National Insurance purposes. Monthly returns will also need to be filed and CIS records need to be diligently kept and updated. Failure to do either of these tasks can also result in a fine from HMRC.

If you’re a subcontractor, you can also sign up for the Construction Industry Scheme on the government’s website. You will need a government gateway ID and password in advance. As well as this, you’ll require your unique tax reference number (UTR). You can find this UTR number in your personal tax account, on the HMRC app or on previous tax return forms.

If you’re wondering ‘what is a CIS registration number?’ this is usally what is being referred to. Since the scheme’s reforms in 2007, a CIS registration number has technically not existed but some people still refer to it. Usually, they simply mean the UTR reference number.

If you’re a brand-new subcontractor, you can also register for your self-assessment tax form at the same time as CIS. All you need to do is select the ‘working as a subcontractor’ option on the self-assessment form.

While you don’t have to register for CIS, unlike contractors where it is mandatory, it is recommended because unregistered subcontractors will be deducted 30% of their earnings as opposed to just 20% for those who are registered.

What is considered a contractor and subcontractor?

It is important to understand where you fit into the CIS system and what you are classified as. It is a legal requirement to register for CIS if you’re a contractor so it is essential you understand the distinctions between the different roles.

A contractor

Contractors are professionals who pay subcontractors to carry out certain construction tasks. These subcontractors are different from any employees that the contractor may have because subcontractors are brought on board to do specific tasks instead of working fulltime for the organisation.

In addition to this, if you are a business that doesn’t work in construction but has spent more than £3 million on construction projects in the last 12 months, it is also mandatory that you register for CIS.

A subcontractor

Unlike a contractor, a subcontractor is paid to carry out the work. In general, subcontractors will be specialists in a certain area and some common examples of subcontractors include:

  • Engineers

  • Electricians

  • Plumbers

  • Carpenters

  • Brickies

  • Plasterers

  • Stone masons

  • And much more

While it is extremely important to understand these distinctions, perhaps the most important distinction of all is between employees and subcontractors. Employees are permanent members of staff who work for you, whereas subcontractors are brought in to fulfil a specific role.

If you incorrectly classify an employee as a subcontractor, HMRC will take action, reclassifying them and fining you.

What does CIS cover?

The Construction Industry Scheme covers the vast majority of the construction industry, including both permanent and temporary projects.

Construction work that is covered, according to CIS, includes the following:

  • Site preparation

  • Demolition

  • All building work

  • Alterations, repairs and decorating

  • The installation of heating, lighting, electrical systems and more

  • Cleaning and maintenance of buildings after construction work

Some notable exceptions that do not need to be declared under CIS include:

  • Architecture and surveying

  • Scaffolding hire (no labour work)

  • Carpet fitting

  • Manufacturing materials used in construction including plant and machinery

  • Delivering materials

  • Work that takes place on construction sites (for instance catering)

So, if you’re a contractor or employer in the construction industry and want to make sure that you’re remaining compliant with all the necessary CIS legislation and regulations, Contractwise is here to help. We’re experts in all CIS related issues and work with organisations all over the country helping people to stay compliant and avoid costly fines. Simply contact our team today to learn more.