What is the Construction Industry Scheme or (CIS)?
The Construction Industry Scheme, or CIS as it is more commonly known, was set up more than 50 years ago to deal with compliance issues in the construction sector. HM Revenue & Customs (HMRC) found that workers were failing to register as self-employed and the lack of regulation around their employment and the cash basis on which many were paid meant that they were losing tens of millions in tax revenue annually.
In 1999, a version of the current CIS regime was launched requiring those who pay subcontractors – eg contractors – to register with HMRC. Any person or business who then works for that contractor on a broad range of construction services, but is not on their payroll, is classed as a subcontractor by HMRC.
How the CIS works
CIS is much like traditional PAYE in that the person or business being paid receives an amount after tax has been deducted. An employee on a company payroll will receive their money after deduction of PAYE and National Insurance and therefore is safe in the knowledge that a) they have paid their taxes, and b) all of the money they have received is theirs to spend.
Prior to CIS being introduced, subcontractors were paid ‘gross’, eg nothing was deducted from the agreed day / job rate. This left it up to the subcontractor to register for tax with HMRC and pay what they owed each year. As noted above, the lack of compliance in this area lead HMRC to introduce this industry specific tax regime.
A contractor who employs subcontractors will ask for their Unique Taxpayer Reference number (their UTR) and check using the HMRC online service whether they are ‘verified’. If they are, the lower deduction rate of 20% will apply. If they are not, a 30% rate will apply. Subsequent ‘net’ payments made to the subcontractor will therefore be made after the appropriate tax rate has been applied.
Subcontractors are not required to register with HMRC, however if they do not their income will suffer a higher percentage deduction than if they register, hence compliance with the scheme is all but assured by this rule.
How to Calculate CIS Deductions
Upon completion of a job / period of time, a subcontractor will submit their invoice for payment. The contractor does not simply apply the 20% or 30% to the gross invoice value, rather each invoice element needs to be considered and potentially adjusted to calculate the value upon which to make the deduction.
Firstly, if the subcontractor is VAT registered, the VAT element is removed. Next, deductions for certain job costs must be made such as materials, small tools consumed, plant hire, fuel used on machinery (not for travelling) and manufacture of materials.
Once all of these elements have been adjusted, the appropriate CIS tax deduction rate is applied to this ‘net’ invoice value. The tax deduction element is paid over to HMRC and the rest is paid to the subcontractor.
Paying deductions to HMRC is done in the exact same way as PAYE and National Insurance. A business registered with HMRC as a contractor will have a ‘PAYE / CIS Scheme’ rather than a standard ‘PAYE Scheme’ but the method of payment and deadlines remain identical.
What is Gross Payment Status for CIS?
Some subcontractors will have ‘gross payment status’ which means a 0% deduction rate is applied. In order to gain this status the subcontractor has to apply to HMRC and pass certain business and compliance tests. If they meet the criteria they will not suffer deductions under the scheme and invoices will be paid in full, however they will still need to take care of their tax affairs at the end of the tax year in the same way as a business that operates in a different industry. There are obvious short term cash flow advantages to having gross payment status, plus the reputation of the subcontractor will be enhanced by showing that they are considered to be in good standing with HMRC.
Record keeping and retention
A contractor must keep detailed records to support their calculations and retain them for a period of at least 3 years. HMRC may request to see CIS records and will levy fines for non-compliance. The records must include subcontractor invoices, backup for how deductions have been calculated and proof that the cost of materials is genuine. This last point is the responsibility of the contractor and therefore it is often necessary to request that subcontractors provide receipts and invoices for the materials they charge on their invoices.
