What is the CIS Scheme?
The Construction Industry Scheme (CIS) was set up by HM Revenue and Customs as a way to minimise tax evasion by deducting tax from subcontractors at source. CIS doesn’t apply to employed members of staff, as employee tax is deducted under the PAYE scheme.
If you operate in the construction industry, CIS can be a complex area of business to negotiate. If you’re a contractor, determining the status of the people you pay for carrying out construction work – whether they’re a subcontractor, or should in fact be regarded as an employee – can be particularly challenging.
How does the CIS scheme work for contractors?
If you pay subcontractors to complete construction work, or spend more than £1 million a year (on average) on construction in any given period of three years, you’ll be regarded as a contractor under CIS.
When you pay your subcontractors you’ll need to ‘verify’ them, which essentially means checking that they’ve registered with HMRC, and this can be done online. If they’ve registered for CIS, you’ll need to deduct tax at a rate of 20%, or 30% if they’re not part of the scheme.
Keeping track of the payments and tax deducted
Good record-keeping is a key issue as a contractor under CIS. You’ll need to record the following information:
- Gross amount paid to your subcontractor
- Amount of tax deducted
- Cost of materials
- Verification number of the subcontractor (if applicable)
You should also provide your subcontractor with a written statement if you’ve deducted tax under CIS.
Business, Turnover and compliance tests
If the subcontractor has successfully applied for ‘gross payment’ status, no tax will be deducted and they’ll deal with their own tax payments at the end of the tax year. To receive payments with no tax deducted at source, the subcontractor needs to pass three tests as follows
Construction work is UK-based, and the business is run using a bank account.
An individual subcontractor’s annual turnover is at least £30,000, with a higher minimum requirement for partnerships and companies.
The subcontractor has no outstanding tax returns or payments due to HMRC.
If the subcontractor passes these three tests, which are repeated each year, they may be able to receive gross payments from their contractor.