Construction Industry Scheme
The Construction Industry Scheme (CIS) sets out the rules for tax and national insurance (NI) for anyone working in the construction industry.
Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. They can be companies, partnerships or self employed individuals.
CIS applies to construction work and also other related jobs such as alterations, repairs, decorating and demolition.
Contractors and Sub Contractors
Contractors include construction companies, building firms, government departments and local authorities.
Subcontractors are those businesses that carry out work for contractors.
A business may be both a contractor and a subcontractor at the same time.
Verification of Sub Contractors
A contractor has to contact HMRC to check whether to pay a subcontractor gross or net.
The verification process, which must be conducted online, will establish which of the following payment options apply
- gross payment
- standard rate deduction of 20%
- higher rate deduction of 30%
A deduction is made at 30% if the subcontractor has not registered with HMRC or cannot provide accurate details to the contractor so HMRC cannot verify them.
HMRC give the contractor a verification number for the subcontractors which will be matched with HMRC’s own records. The number will be the same for each subcontractor verified at any particular time.
There are special suffixes for the numbers issued in respect of subcontractors who cannot be verified. The numbers are also shown on contractors’ monthly returns and the payslips issued to the subcontractors.
All contractors have to make an online monthly return to HMRC with details of payments made to all subcontractors and any deductions of tax made from those payments.
The monthly return relates to each tax month (running from the 6th of one month to the 5th of the next).
All contractors must file monthly even if they are entitled to pay their PAYE quarterly.
The CIS system is full of penalties for non compliance.
Penalties are issued for fairly minor procedural failures and can often seem completely disproportional to the 'offence'.
Late returns result in penalties as follows:
- £100 for failure to meet due date of the 19th of the month
- where failure continues after two months after the due date, a penalty of £200
- after six months the penalty rises to the greater of 5% of the tax or £300
- after 12 months the penalty will again be the greater of £300 or 5% of the tax but, where the withholding of information is deliberate and concealed, it will be 100% of the tax (or £3,000 if greater) and where information is withheld deliberately, 70% of tax (or £1,500 if greater).
When a subcontractor first starts working in the construction industry on a self-employed basis they must register for CIS.
To register, a subcontractor needs to contact HMRC by phone or over the internet and they will conduct identity checks.
Gross payment status
The rules for subcontractors to be paid gross include a business test, a turnover test and a compliance test.
To qualify for gross payment a subcontractor must:
- have paid their tax and National Insurance on time in the past
- do construction work (or provide labour for it) in the UK
- run the business through a bank account.
The turnover for the last 12 month, ignoring VAT and the cost of materials, must be at least:
- £30,000 for a sole trader
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
- £30,000 for each director of a company, or at least £100,000 for the whole company. If a company is controlled by 5 people or fewer, there must be an annual turnover of £30,000 for each of them.