If you’re involved in the construction industry in the UK, it’s essential to understand the ins and outs of the Construction Industry Scheme deduction (CIS deduction).
But what exactly does it involve, and how can you ensure you’re following the rules correctly? In this article, we’ll break down the CIS deduction and provide you with practical tips to help you navigate the process smoothly.
General principle behind CIS
The Construction Industry Scheme deduction (CIS deduction) is a tax deduction system used in the UK construction industry. Contractors are required to deduct a percentage of payments made to subcontractors for construction work and then pay this amount directly to HM Revenue and Customs (HMRC) on their behalf.
In essence, the CIS deductions apply only to the labour portion of payments made to subcontractors, and these deductions are regarded as prepayments toward the subcontractor’s tax and national insurance.
Who Really is a Contractor?
A business can fall into either the category of a mainstream contractor or a deemed contractor.
A mainstream contractor is a business primarily involved in construction work and who hires others to carry out construction work.
In contrast, non-construction businesses that have spent more than £3m on significant construction operations within a rolling 12-month period fall under deemed contractor’s category.
If you belong to any of the contractor categories mentioned above, you are obligated to fulfil certain duties under the Construction Industry Scheme (CIS). The obligations include a range of tasks such as verifying subcontractors, making CIS deductions, filing CIS return, and paying the deductions to HMRC.
Understanding Subcontractors
A subcontractor is a company or individual hired by a contractor to complete construction work on a project. Subcontractors are typically hired in the construction industry to perform specific tasks or services.
However, they are not an employee of the contractor.
Pre-CIS Deductions
HMRC requires the verification of subcontractors before they start working for the contractor.
Verification is the process of determining whether a subcontractor has registered with HMRC and what is their payment status.
As per HMRC, the CIS deduction rate is:
- 20% for registered subcontractors.
- 30% for unregistered subcontractors.
- 0% if the subcontractor has Gross Payment Status – for example they do not have deductions made.
Gross payment status means that the contractor will pay in full without deduction. A subcontractor must pass three tests in order to qualify for the gross payment status.
The three tests are: Business test, Turnover test and a Compliance test.
Read our article on Qualifying conditions for Gross Payment Status to test whether the subcontractor’s business is eligible to apply for the Gross Payment Status.
CIS Deductions
Once the rate of deduction is determined, the next step is to calculate the CIS tax amount.
Follow these easy steps to calculate the CIS tax deduction:
1. First, take the total (gross) amount of the subcontractor’s invoice.
2. Subtract the following amounts paid to the subcontractor from the invoice total:
- Value-added Tax (VAT)
- Materials
- Plant hire costs
- Other allowable deduction
3. Multiply the remaining amount by the CIS deduction rate to get the CIS amount.
To delve deeper into the deductions process, let’s take a closer look at an example:
For Example,
– ‘Bob the builder’ is a contractor specialising in developing commercial buildings and infrastructure. He delegates most of his work to subcontractor ‘Shrek and Co’.
– ‘Shrek and Co.’ sent an invoice amounting to £49,500 (exclusive of VAT) out of which £30,000 is for the construction material, and £19,500 for the labour cost. Shrek and Co. is registered in VAT and CIS at a standard rate.
|
Details |
Price |
|---|---|
|
Construction Material Cost |
£30,000 |
|
Labour Cost |
£19,500 |
|
Subtotal |
£49,500 |
|
VAT at 20% |
£9,900 |
|
CIS deducted at 20% |
£3,900 |
|
Payment to Shrek and Co. |
£55,000 |
Post CIS Deductions
We’re getting close to the end.
The next step after following the CIS liability calculation is to submit a CIS return and then pay deductions to HMRC.
CIS return Submission
Every month, the contractor must submit a Construction Industry Scheme- CIS300 return within the 19th of the month. This implies the CIS return of March needs to be sent to HMRC by 19th April.
HMRC charges the contractor with a late payment penalty for not filing the CIS return on time. Our “A complete guide to Construction Industry Scheme article” covers the late payment penalty rates in detail.
Deduction Payment to HMRC
As a final step, the contractor must pass the CIS deductions they have withheld from the subcontractors to HM Revenue and Customs (HMRC).
To pay HM Revenue and Customs (HMRC), the contractor can use the Construction Industry Scheme (CIS) payment scheme.
HMRC establishes a Construction Industry Scheme (CIS) payment scheme for every construction business upon registering as a Contractor.
But, if the contractor has already been running payroll, HMRC will change their existing PAYE scheme into PAYE/CIS payment scheme. This means the contractor can pay both the PAYE liability and CIS using the same payment reference number.
The payments to HMRC should reach HMRC by the 22nd of every month. Alternatively, when making payment by post, ensure the payment reaches HM Revenue and Customs (HMRC) by the 19th of every month.
Our “A complete guide to Construction Industry Scheme article” covers the late payment penalty rates in detail.
Conclusion
In conclusion, the CIS deduction is a vital aspect of the UK construction industry that helps ensure that contractors and subcontractors comply with tax laws.
By deducting a portion of payments made to subcontractors, the system provides a prepayment towards their tax and national insurance contributions, helping to streamline the taxation process. However, it’s essential to note that failure to comply with the CIS deduction rules can lead to hefty fines and legal consequences.
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