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What is the construction industry scheme and what does it mean for you?

If you are self-employed in the building or construction trade, then it's your responsibility to manage your taxes. But, are you clued up on your obligations? The Government's Construction Industry Scheme (CIS) is a way of reducing tax evasion in the construction industry and helping subcontractors spread their tax liabilities over the financial year.

The CIS is an HMRC scheme that applies if you work for a contractor in the construction industry but not as an employee; it's time to understand how it works. Here we explain all about the construction industry scheme and what it means for you.

What is the construction industry scheme?

As an alternative to employing staff, contractors in the construction industry will often use independent subcontractors to work on projects with them short-term or long-term. Since the subcontractors are self-employed and not employees of you as a contractor, they cannot make Income Tax and National Insurance contributions through schemes such as PAYE.

How does the construction industry scheme work?

So, what does that mean for you? Under the Construction Industry Scheme, HMRC collects these tax contributions by the contractors deducting the money from the amount they pay a subcontractor and then pay that money to HMRC.

In simple terms, the scheme is similar to PAYE. It requires contractors to deduct 20% to 30% of subcontractor payments and pay this amount to HMRC. Under the scheme, contractors deduct money from a subcontractor's payment and pass it onto HMRC. The deductions count as advance payments towards the subcontractor's tax and National Insurance.

What kind of work is covered by CIS?

Construction is a varied industry but if you're a mainstream contractor and you use a flexible workforce or subcontractors, the CIS applies to you whether you're a builder or property developer. Subcontractors don't have to register, but deductions are taken from your payments at the higher rate of 30% if you do not register.

In basic terms, as a contractor, the CIS applies to you if:

  • You pay subcontractors for construction work.
  • Your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment.

The kind of work covered by CIS includes:

  • Site preparation work such as laying foundations and providing access works.
  • Demolition and dismantling.
  • General building work.
  • Alterations, repairs and decorating.
  • Installing systems for heating, lighting, power, water and ventilation.
  • Cleaning the inside of buildings after construction work.

Who is affected?

There are two elements to the CIS - contractors and subcontractors. If you are self-employed and taken on by a contactor this will make you a subcontractor. In this case, you can choose whether or not to register under the CIS but as a contractor, you must register.

Can you be a contractor and a subcontractor? Yes! For example, if a self-employed electrician is contracted by a local building company, this would fall under the CIS. On the other hand, if the same electrician subcontracted out some of their work to another electrician, they are then acting as the main contractor.

How do you register for the construction industry scheme?

Whether you're a contractor or subcontractor the registration process is fairly easy and can be done online.

As a subcontractor the registration process is as follows:

  • Go online via the 'Government Gateway' or call the CIS helpline (0300 200 3210).
  • Give your UTR or your company's UTR if registering as a company – and personal details including your National Insurance Number and VAT number.
  • When your Contractor hires you, give them your UTR and your NI number (if self-employed) or the Company number and company UTR (if you are trading as a company).
  • When you complete your Tax Return, you get credit for any CIS tax deducted – either off income tax, Corporation Tax or deducted from any PAYE/NI payments you may make as an employer.

As a contractor the registration process is as follows:

  • Your obligations to the CIS are usually noted when you or your accountant register for PAYE.
  • If you are already registered for PAYE before becoming a Contractor, then you need to call the CIS helpline (0300 200 3210).
  • You will need to give certain information – your PAYE reference and UTR number – and then the registration can be simply done by HMRC updating their system.

 When should you hire an accountant?

If your business activity falls under the construction industry scheme then it's a good idea to seek expert help. Managing your business finances can be complicated, so to make the process as simple as possible, appointing an accountant who will know exactly what your obligations are will make things easier.

If you want to get your finances in order, the team at Keith Graham Chartered Accountants can help. We offer a range of business accountancy services in Surrey and Hampshire that will make managing your taxes a whole lot easier. With over 20 years of experience, you can rely on us to provide expert support no matter how big or small your business is. Get in touch with us today for more information.