The Construction Industry Scheme (CIS) affects the way that subcontractors in the construction industry pay tax in the UK. It means that the contractors they work for must deduct tax before paying them.

The Construction Industry Scheme (sometimes just called CIS) is a set of rules which affects the way that contractors working in the UK construction industry pay the subcontractors carrying out work for them.

Under CIS rules, contractors must make deductions from their subcontractors’ invoices, and report these to HMRC via a CIS return.

Similar to the way in which employers make deductions for their employees’ tax and National Insurance, these deductions are basically an advance payment towards the subcontractor’s tax bill for the year.

How much are CIS deductions?

This depends on whether or not the subcontractor is registered for the Construction Industry Scheme. Contractors must verify their new subcontractor with HMRC before any work starts, so they can confirm their registration and tax status.

This CIS registration status is important, because it affects how much the contractor must deduct from the subcontractor’s invoice before they pay it.

• If a subcontractor is registered for CIS, the contractor must deduct 20% of the invoice’s value before paying them
• When a subcontractor isn’t registered for CIS, the contractor must deduct 30%. Ouch!

Contractors are hired to carry out specific tasks, and sometimes hire subcontractors to carry out work for them. It’s crucial that you know whether you’re considered a contractor or a subcontractor under the Construction Industry Scheme rules, so that you pay the right amount of tax and National Insurance and report the correct information to HMRC.

As far as the Construction Industry Scheme (CIS) is concerned, a subcontractor is a business or organisation which agrees to carry out construction work on behalf of a contractor.

 
You might accept the contract as a self-employed sole trader or through your own limited company, or as some other type of business structure such as a partnership. Subcontractors can also be:

• An agency or organisation which carries out construction work for a contractor using its own workers, or which supplies them to a contractor. This is different to an agency which ‘introduces’ someone with the intention that the contractor becomes their employer.
• A local authority or some other type of public organisation
• A gang leader (sometimes known as a ganger) who is contracted to coordinate and supervise a team

No, being a subcontractor isn’t the same as being directly employed by a contractor. Rather than working for the contractor as a regular employee, the contractor is basically your client.

That said, it’s the contractor’s responsibility to assess your employment status when you agree to carry out any work for them as a subcontractor. They should use HMRC’s Confirmation of Employment Status Tool (CEST) to do this – it’s not up to them to choose!
 

Not every contract will come under CIS rules, for instance if the work is being paid for by a trust or a charity. There are also some circumstances when HMRC will exempt a contract from CIS.

Does CIS only apply in the UK?

Yes, the Construction Industry Scheme only applies to work taking place in the UK. A UK firm can have a contract to carry out work overseas and CIS won’t apply. On the other hand, an overseas firm doing construction work in the UK might be subject to CIS, so always check!

If you do fit the criteria of a subcontractor working in the construction industry, then ideally you should register for CIS as soon as possible. Registering means that contractors will make deductions at the lower rate, and this can make it easier to manage your cash flow throughout the year.

You’ll also need to give information to the contractor you’re carrying out work for, so that they can verify your CIS registration status. The information you provide depends on how you operate your business:

• Sole trader: Your Unique Taxpayer Reference (UTR) number and National Insurance number
• Limited company: Company name, registration number, and company UTR number
• Partnership: The name of the nominated partner, and the partnership’s trading name and UTR number

Do I need to submit a CIS return?

It’s the contractor’s responsibility to submit a CIS return each month, so as a subcontractor you won’t need to worry about that bit.

If you’re a sole trader then the contractor you carry out work for will deduct CIS tax depending on whether or not you’re registered for the CIS scheme.

• If you’re CIS registered, the contractor will deduct 20% for CIS tax before they pay you.
• If you’re not CIS registered, they’ll deduct 30%. When you submit Self Assessment, you can reclaim any overpayments that might happen as a result of this.

What does the tax-free Personal Allowance mean for sub-contractors?

The tax-free Personal Allowance is the amount you can earn before starting to pay tax. To explain why this is particularly relevant for sub-contractors, we’ll look at how it works for a regular employee.

If you work for an employer

• They will normally apply the allowance to what they expect you to earn in a year.
• This means that they’ll take the allowance into account when they work out how much to deduct from your wages each time that they pay you.
• By the time you reach the end of the year, you’ve normally paid the right amount of tax (or very close to it).

If you’re a sub-contractor

• The contractor won’t take the allowance into account when they work out how much CIS tax to deduct before paying you.
• As a result, some sub-contractors reach the end of the tax year having paid a lot of tax, but without using up their Personal Allowance.
• This means that they’ve paid more tax than they needed to, and can claim a tax rebate once they submit their Self Assessment.

So, if you’re a sub-contractor, it’s worth getting your return in as soon as possible, so you can reclaim any tax rebates sooner!

 
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