The construction industry scheme works a little like a payroll scheme but for the constructions industry.
Contractors employ subcontractors for jobs, on which they must deduct tax but not national insurance and pay it monthly to HMRC. These deductions are then used as advance payments towards the subcontractor’s tax and National Insurance bill.
A contractor is a company or a person who employs a subcontractor to do construction work and may be a sole trader, a partnership or a limited company.
Mainstream contractors are builders, labour agencies, gangmasters (or gang leader) or property developers.
Subcontractors are workers who work for contractors. They can also be a sole trader, a partnership or a limited company. They will be responsible for their own tax and national insurance.
CIS Deduction Rates
Subcontractors may pay tax at three rates:
- 0% Gross Payment Status – if the subcontractor is trading as a business rather than a self-employed subcontractor, they can apply for gross payment status. This may be granted if the business passes three tests:
- Business Test: That the business operates as a business – issuing invoices and receiving payments into a business bank account.
- Turnover Test: >£30,000 for a sole trader, or £30,000 per director if a limited company
- Compliance test: In the last 12 months – the business must have filed all tax returns on time and paid all tax in full and on time.
- 20% CIS reduction for verified subcontractors
- 30% higher rate CIS deduction for unverified subcontractors
It is your responsibility to verify the subcontractors you use, this can be done quickly and easily through HMRC’s CIS online system. We are also able to do this for your subcontractors.
Subcontractors do not have to be registered with HMRC, but it’s in their best interests to be verified to avoid the higher rate CIS tax deduction.
You may need to deduct CIS tax at the higher rate for a new unverified subcontractor. You cannot refund that back to the subcontractor once they are verified – they must wait until the end of the tax year and submit their self assessment tax return. HMRC will refund any overpayment due.
Exempt jobs, not subject to CIS
The objective of the CIS scheme is to provide a tax structure for general building and contractors – where subcontractors providing labour are generally self-employed and move from job to job. Some jobs are exempt from the scheme:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- delivering materials
- work on construction sites that is clearly not construction, eg running a canteen or site facilities
It is good practice to engage your contractors with a contract – the contract will state whether or not the contractor is employed or self-employed.
You can employ subcontractors as staff and deduct tax and National Insurance if you prefer or you can engage them as subcontractors under the CIS scheme.
Registering as a contractor
Before you can start running a CIS scheme, you must register as a contractor.
- First, you must register as an employer (assuming you are not already registered) – HMRC will issue you with a PAYE reference number
- Secondly, you must register as a contractor under the CIS Scheme. You’ll need the PAYE reference number for this.
If you in the construction industry then contact us today for free advice on CIS and how Easy Peasy Accounting can help you.