Construction Industry Scheme: What is it and are you liable?
The Construction Industry Scheme (CIS) applies to contractors,
subcontractors and any organisations that have a high annual spend
on construction, even if their main work isn't in the industry. If
your firm is involved in construction, it may need to register with
HMRC under CIS.
When registering you need to indicate whether you're a
contractor or subcontractor as different rules apply to each
category. Within each category there are separate terms that define
Are you a contractor?
- You're a mainstream contractor if you run a business that
engages subcontractors for construction operations. Mainstream
contractors are usually property developers or speculative builders
building or altering properties to sell on for profit. Foreign
businesses that carry out construction work in the UK are also
mainstream contractors as are businesses that will spend an average
of £1m a year purely on construction operations over a three-year
- These are business whose main source of work is in another
industry but they still spend a large amount on construction. If
your business becomes a deemed contractor, then it will remain as
one until it can prove to the HMRC that its spending on
construction is below £1m a year for three years consecutively.
Deemed contractors are usually manufacturers, retailers, local
authorities, government departments, housing associations.
Are you a subcontractor?
Under the CIS, you are a subcontractor if you agree to complete
construction work for a contractor. This will count whether you do
the work yourself, get your employees to do it or use your own
subcontractors. Subcontractors include: sole traders, partnerships,
companies that carry out construction work for contractors, labour
agencies and staff bureaux that use their own workers to do
construction work for a contractor. It also applies to gang leaders
who have a contract to carry out work for a contractor, foreign
businesses paid to do construction work in the UK or local
authorities that carry out construction work for someone else.
Are you an Employee?
If you're an employee then CIS doesn't apply you. You're classed
as an employee if your contract is a 'contract of employment'. If
this is the case, you'll pay tax through PAYE (Pay As You Earn)
rather then through CIS.
Your employment status depends on the terms of each piece of
work you take on. It's possible to operate as a self-employed
subcontractor on one contract and then as an employee on the next.
If you're a construction industry contractor it's your
responsibility to decide on an individuals employment status when
you take them on.
To find out if you're working as an employee or a contractor you
can use the employment status indicator tool on the HMRC's
Are you both a contractor and a subcontractor at the same
It's common for construction businesses to be paid by a
contractor for construction work, while they pay for their own
subcontractors to do work for them at the same time.
When you're being paid by a contractor for construction work you
are a subcontractor and you must follow CIS rules for
subcontractors. However, when you're paying your own subcontractors
you must abide by the CIS rules for contractors.
When CIS doesn't apply
Specific types of work that are related to the construction
industry aren't covered by CIS. Professional work carried out by
businesses such as architects and surveyors is not covered.
CIS also doesn't include carpet fitting but does apply for
laminate flooring fitting.
There are occasional situations when businesses that would
normally be classed as mainstream or deemed contractors may not
have to apply for CIS ruling. An example of this is when
these businesses pay for construction work on a property that is
used for the purpose of the business. This means some offices,
warehouses and nursing homes are exempt from CIS. Other
occasions when CIS rules don't apply are:
- When a deemed contractor pays for a small construction contract
of less than £1,000 - excluding materials costs - and has
authorisation from HMRC to exempt it.
- When a contractor pays a subcontractor less than £1,000 -
excluding materials costs - to do construction work on the
subcontractor's own property - or on any agricultural property
where the subcontractor is the tenant - and has authorisation from
HMRC to exempt it.
- If the governing body or head teacher of a local education
authority maintained school, pays for construction work on behalf
of the local education authority.
- If a charitable body or trust - but not its trading subsidiary
- pays for construction work.
- Private householders are never treated as CIS contractors, no
matter how much they spend on construction operations.
How to organise your CIS payments
Contractors must make a 20% deduction from most of the value of
invoices they pay and give it to HMRC. However, at the end of the
year after looking at all your payments HMRC may ask for an
additional amount in view of your eventual tax and national
The deduction is held on account of your eventual tax and
national insurance contributions liability.
If you are required to pay CIS you have to tell HMRC each month
about every payment you've made to subcontractors. To do this you
have to make a monthly return.
HMRC expects you to keep records of all the payments you
make. One tool that is useful for recording all payments and
invoices is QuickBooks CIS deductions.
QuickBooks will help you work out how much tax you will have to
pay, so you can concentrate on running the business and forget
about CIS and the bean-counting it requires.
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