A Guide To What is Construction Industry Scheme (CIS)?
As the name suggests, the Construction Industry Scheme is meant to regulate the dynamics within the construction industry. The Construction Industry Scheme (CIS) is a tax deduction scheme that the UK government established to regulate how payments are made in the construction sector. Its prime purpose is to promote fairness, transparency, and compliance within the industry.
Hence, this post is going to cover all the aspects of what is Construction Industry Scheme (CIS) to give you an insight into its working and objective.
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What is Construction Industry Scheme (CIS)?
Launched in 1971 by HMRC, the Construction Industry Scheme (CIS) was put in place with the principal purpose of ensuring no tax evasion occurs and safeguarding the workers associated with the construction industry from false employment. Primarily, in the CIS, contractors are required to deduct money from the payments made to subcontractors and then submit it to HMRC to fulfil the income tax and NI obligations. The deductions are made as advance payments to cover the subcontractor’s taxes and NICs.
It is worth mentioning here that the Construction Industry Scheme is inapplicable to employees within the construction sector because their income tax and NICs fall under the Pay As You Earn (PAYE) scheme. Therefore, the CIS only applies to the subcontractors connected to the construction industry.
To know more about PAYE, read our respective guides:
Moving ahead, while learning what is Construction Industry Scheme, it is also essential to gain clarity on who is counted as a contractor or subcontractor. Notably, under the HMRC guidelines for contractor and subcontractor, an individual must register as a contractor if:
- They pay subcontractors for construction work.
- Although their business does not do construction work, they have incurred over £3 million on construction within the 12 months since they made their first payment.
Similarly, an individual will register as a subcontractor if they carry out the construction work for a contractor. More importantly, for an individual falling under the categories of both a contractor and subcontractor, it is crucial for them to register as both.
What is The Purpose Of The CIS?
Now, through the CIS, the government aims to combat and contain tax evasion and ensure that all individuals and businesses involved in the construction industry contribute their shares of taxes fairly to public funds. Furthermore, with the CIS, financial transactions become streamlined since it establishes a clear framework for tax deductions and reporting. Consequently, the CIS encourages transparency and fairness within the construction industry.
How Does The CIS Work?
As mentioned above, the Construction Industry Scheme (CIS) is an HMRC-launched scheme applying to those working for a contractor in the construction industry. However, they must not work there as an employee to be eligible for the CIS. It is worth pointing out that CIS is designed particularly for self-employed individuals associated with the building or construction trade to pay their taxes under the CIS. To go into detail, it is different from other self-employed individuals not associated with the construction industry since they usually receive gross payments. The gross payment is the total amount before any tax or NIC is deducted.
If you are keen on knowing more about gross pay and how it differs from net pay, read our guide:
It is highlighted once again that despite the fact that a contractor withholds tax under the CIS on payments made to you being a subcontractor you may receive documents that seem similar to payslips. Yet, you must know that you are not regarded as an employee under the CIS. As a result, you will not be entitled to claim any of the employment rights that an employee usually receives or benefits from.
What Are The Deduction Rates Under The CIS?
It is of immense importance to learn the deduction rates to fully understand what is construction Industry Scheme. The amount of tax that a contractor withholds from a subcontractor’s payments depends on whether they register as a subcontractor under the CIS. Typically, when a contractor makes payments to a subcontractor under CIS, they make deductions at the standard rate of 20%, given the subcontractor is registered with HMRC.
Conversely, contractors are liable to make deductions at a higher rate of 30% if:
- The subcontractor is not registered for CIS.
- The contractor is unable to verify a subcontractor.
- A subcontractor gives the wrong name for their business.
In addition, a contractor gives monthly statements of payments and deductions to the subcontractors. They can use them to calculate whether they still owe any tax and NICs to HMRC or are entitled to reclaim a refund.
To stay updated with the deduction rates, you are advised to keep Visit the Government Website frequently:
Who Registers For The CIS?
It is noteworthy that all the contractors must register for the Construction Industry Scheme. On the contrary, subcontractors are not liable to register for the CIS. However, the contractors will make deductions from their payments at a higher rate if they’re not registered. What’s more, if a self-employed individual has already registered as a contractor, they can viably sign in to CIS online to complete and file their monthly returns or identify a subcontractor.
In order to know more about how to register as a contractor and a subcontractor according to the HMRC regulations, visit the government website.
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Conclusion:
Summed up briefly, comprehending everything about what is Construction Industry Scheme, including how it works and what the deduction rates under it, is essential since the construction industry workers can ensure tax compliance with HMRC through the CIS. Contractors, under the CIS, ensure to deduct the tax amount before making payments to the subcontractors to ensure accurate tax deductions.
Moreover, with an accountant, a contractor can execute several CIS-related tasks, such as registering them for CIS and calculating the subcontractors’ CIS tax liability and other tax liabilities. Beyond that, a skilled accountant can also help you prepare and submit your self-assessment tax return to HMRC. Accordingly, the accountants at payrollservices.accountants offer across-the-board services in all your payroll-and-CIS-related matters
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Disclaimer: Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
