How does the Construction Industry Scheme work for a small builder?
Under CIS, a contractor takes a deduction from what it pays a subcontractor and passes it to HMRC as an advance payment towards the subcontractor's tax and National Insurance. The rates are 20% for registered subcontractors, 30% for unregistered ones and nothing for those with gross payment status.
Who has to register
Contractors must register. You are a contractor if you pay subcontractors for construction work, whether you are a sole trader, a partnership or a limited company. Register before you take on your first subcontractor, using the process for setting up as a new employer.
Subcontractors do not have to register, but if they do not, the deduction from their payments is higher. GOV.UK says to register if you do construction work for a contractor as a sole trader, limited company owner or partner. Employees do not register. If you are both, register as both.
A business that does no construction work still counts as a contractor once it has spent more than £3 million on construction in the 12 months since its first payment.
Check that a subcontractor should not be your employee instead. GOV.UK says you may get a penalty if they should have been.
The deduction rates
- 20% from a subcontractor who is registered for CIS and whom you can verify
- 30% from a subcontractor who is not registered, or whom you cannot verify
- 0% if the subcontractor has gross payment status, so they are paid in full and sort out their own tax
The deduction is not taken from the whole invoice. Start with the gross amount and take away VAT, consumable stores, fuel (other than for travelling), plant hire, manufacturing or prefabricating materials, and materials the subcontractor paid for directly. The CIS percentage comes off what is left.
Verifying subcontractors
Before you pay a new subcontractor you have to verify them with HMRC. HMRC tells you whether they are registered and which rate to use. You must also verify a subcontractor you have used before if they have not been on one of your returns in the current or last two tax years.
You need the subcontractor's UTR and, for a sole trader, their National Insurance number, or for a company its name, UTR and registration number. These must match exactly what the subcontractor gave HMRC. Verify through HMRC's free CIS online service or commercial CIS software, which you need for more than 50 subcontractors.
Returns, payments and statements
- Monthly return: it must reach HMRC by the 19th after the end of the tax month. A tax month runs from the 6th to the 5th, so the return for 6 May to 5 June is due by 19 June. If you paid no one, file a nil return or tell HMRC you have stopped using subcontractors for now.
- Paying HMRC: pay the deductions by the 22nd of the month, or the 19th if you pay by post.
- Statement to the subcontractor: if you made deductions, give them a payment and deduction statement within 14 days of the end of the tax month, so by 19 June in the same example.
- Records: keep the gross amount of each invoice excluding VAT, the deductions you made and, where you deducted, the materials cost invoiced, for at least 3 years after the tax year ends.
Late returns carry penalties that start at £100 for a day late. You can also get a penalty of up to £3,000 for giving the wrong employment status on a return, or for not being able to produce your CIS records when HMRC asks.
Gross payment status for subcontractors
A subcontractor can apply for gross payment status. HMRC checks that you have paid your tax and National Insurance on time, do construction work in the UK and run the business through a bank account. Turnover for the last 12 months, ignoring VAT and materials, must be at least £30,000 for a sole trader, or £30,000 per partner or director (or £100,000 for the whole business) in a partnership or company. HMRC reviews it every year.
A subcontractor paid under deduction should keep every statement, because a sole trader puts the deductions on their Self Assessment return to count towards their tax.
What CIS does not cover
Private householders are not contractors, so a homeowner paying you for work on their own home does not operate CIS. If you then pay subcontractors on that job, you are the contractor and CIS applies to those payments.
GOV.UK also lists work paid for by a charity or trust, or by a maintained school on behalf of the local education authority, as outside the scheme. Some jobs are not CIS construction work, including architecture and surveying, scaffolding hire with no labour, carpet fitting, delivering materials, and running a site canteen.