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 your business.
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.
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 website.
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:
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 insurance contributions.
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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