Construction Industry Scheme

06 Feb 2024

What is the Construction Industry Scheme?

As everyone who works within the construction industry will know, there is always a lot to think about.

As well as ensuring work is carried out safely and to a high standard, there are often a lot of administration and logistical tasks to carry out. This can include everything from organising timelines to ordering required materials.

Another consideration is ensuring that you or your business is fully compliant with the country’s various taxation legislation.

While every business in every industry needs to ensure they’re completing their tax affairs correctly, for those within construction there are the additional rules relating to the Construction Industry Scheme (CIS) to concern themselves with.

CIS compliance is essential for every construction business, and in this article, we’ll answer the question ‘what is the Construction Industry Scheme?’

As well as explaining how it protects contractors and subcontractors, we’ll provide you with a comprehensive Construction Industry Scheme guide that will help you remain compliant while also ensuring you fully understand the rules.

Read on to find out more.

What is the Construction Industry Scheme?

First and foremost, let’s outline exactly what the Construction Industry Scheme (CIS) actually is.

In short, the Construction Industry Scheme (CIS) is an HMRC scheme that applies to those within the construction sector. The scheme applies to those who work for a contractor in the industry but not as an employee. Therefore, it particularly applies to self-employed people who provide their services to contractors in all types of construction industries.

The scheme works by contractors deducting money from the subcontractor's payments and passing it directly to HMRC. This deduction will then count as an advance payment towards the subcontractor’s tax and national insurance responsibilities. All contractors must register for the scheme as part of their payroll services, and while subcontractors are not obliged to register, the amount of money taken will be higher for unregistered subcontractors.

The contractor will deduct 20% from subcontractors that are registered and 30% from those that are not.

This scheme is in contrast to the conventional way that self-employed people handle their tax affairs outside of the construction industry. Typically, self-employed individuals receive their payment without any tax deductions and then have to declare it themselves. However, the CIS process has been made specific to the construction industry. This is to try and make it easier for subcontractors to be compliant with their taxes.

It’s worth noting that even though a contractor will withhold some of the money for HMRC purposes, you will still receive documents that are similar or akin to conventional pay slips.

Furthermore, you should be aware that if you provide your services directly to a homeowner, rather than a contractor, for domestic projects this does not fall under the CIS. Therefore, the customer will pay you in full and you must declare your tax in the usual way for self-employed individuals.

Who counts as a contractor and subcontractor?

Now, let’s establish who counts as a contractor and who is a subcontractor. In particular, it’s important you properly understand the distinction between subcontractors and employees. If HMRC audits your organisation and decides to reclassify people who work for you from subcontractors to employees, you could be responsible for costly retrospective national insurance contributions - so it’s essential you know the differences.

A contractor counts as someone who pays subcontractors (who do not work for them) to carry out construction work. Alternatively, if your business does not do construction work but you have spent more than £3 million on construction projects in the last 12 months since making your first payment you should also register as a contractor.

A subcontractor is someone who does the construction work for a contractor.

No matter what category you fall into, it’s important you register with CIS to make sure you’re fully compliant.

What work does the CIS cover?

The Construction Industry Scheme covers most construction work, and also other aspects of civil and building work. This includes work on permanent or temporary buildings and structures as well as civil engineering work such as to roads and bridges.

Construction work under CIS is defined as:

  • Site preparation

  • Demolition and dismantling

  • Building work

  • Alterations, repairs and decorating

  • Installing heating, lighting, power and water systems

  • Cleaning buildings after construction has occurred

There are some notable exceptions where you will not have to register for CIS.

This includes:

  • 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)

For further Construction Industry Scheme guidance on the type of work that falls under the scheme, you can visit the government’s website.

Do I need to register with HMRC?

If you’re a contractor or a subcontractor, you should register for CIS. In some instances, it is possible to be both a contractor and a subcontractor and you will need to consider how to register with HMRC under the Construction Industry Scheme.

If you are a contractor, there are no two ways about it - you must register for CIS. You can do this by visiting the government’s website.

If you are a subcontractor, you can choose whether to register or not. However, you should bear in mind the tax deductions you will face. A contractor will withhold 20% of the money if you are registered but this will increase to 30% if you decide not to register.

If you do decide to register as a subcontractor, there are a number of ways you can do so. There are different methods depending on whether or not you’ve already registered as self-employed or if you’re working as a sole trader through a different trading entity. However, it is important to note that registering with CIS is in addition to registering as self-employed. Just because you’ve registered for CIS does not mean that you will also automatically be then acknowledged as self-employed by the relevant authorities.

Therefore, for those people who are new to both self-employment and the Construction Industry Scheme process, it’s important to recognise you will need to register for two separate things. However, you can register for both at the same time in a fairly easy manner.

What if I am not based in the UK?

If your company is not registered or based in the UK, it’s important to acknowledge that the Construction Industry Scheme rules will still apply if you conduct work or have any operations within the UK. There are also various other rules that dictate tax rules to those who have businesses outside the UK but do work within it.

The CIS rules also slightly differ depending on what part of the UK you’re in. What we’ve discussed throughout this article largely focuses on England, and devolution has meant that Scotland now sets its own specific rates of tax whereas Wales introduced its own partial devolution income tax from 2019 onwards.

The way that CIS interacts and differs as a result of these specific laws could impact how much you pay, so it’s worth finding out how this might affect you. The government’s website goes into more detail on this issue or you can consult CIS experts, like Contractwise, who will be able to advise.

What is gross payment status?

If you’ve signed up for the Construction Industry Scheme and you’ve ensured that all of your tax affairs are proper and up-to-date, then you can apply for HMRC for something known as gross payment status.

In certain circumstances, this will allow a contractor to pay a subcontractor 100% of their payment without the usual deductions.

As the subcontractor, you will have to apply for gross payment status at the same time that you’re registering for CIS. There are other conditions that you will need to be eligible for this including:

  • All your national insurance payments have been on time

  • You do construction work in the UK

  • Your business is run through a bank account

  • Your turnover is at least £30,000 per year as a sole trader or at least £100,000 as part of a partnership or whole company

Even if you’re granted gross payment status, you still need to properly declare your income at the end of the tax year.

Does CIS impact my employment rights?

Every employee will have certain employment rights when they start working for a company, however, as a self-employed subcontractor you will not receive the same rights as an official employee.

Many of the subcontractors who make use of the Construction Industry Scheme will be classified as self-employed, meaning employment rights are more limited and being a member of CIS will not change this.

At Contractwise, we can assist with your CIS payroll ensuring you’re fully compliant and do not run the risk of HMRC reclassifying your subcontractors. We can carry out a completely free audit of your workforce, ensuring everything is as it should be and assisting with all of your CIS payments.

To find out more about what we do, contact our team today.