A Guide to The Construction Industry Scheme (CIS)
All payments to freelance subcontractors in the UK construction industry are taxed differently from other freelance occupations. That's because these come under the HMRC CIS scheme.
The Construction Industry Scheme (CIS) insists contractors who have taken on workers on a temporary basis - i.e. they aren't paying them as employees – must deduct monthly CIS tax, which they then send to HMRC. When it comes to CIS accounting practices, only the cost of any materials the subcontractor has paid for is exempt from the calculation. Before taking on a subcontractor, all contractors must inform HMRC that they will be using the CIS scheme.
Checking the subcontractor's tax status
Before the contractor knows how much CIS cash to deduct, they must first verify that the subcontractor is registered with the CIS scheme. However, if they have worked with the contractor within the past two years, there's no need to check. Otherwise, it's a case of contacting HMRC with the subcontractor's details and getting confirmation of their registration. It's then that the contractor will be told how much to deduct from the subcontractor's payment in keeping with the HMRC CIS scheme. It's usually around 20 percent of the payment, but for unverified subcontractors, it's 30 per cent.
Jobs the HMRC CIS scheme applies to
Most work on a construction site comes under the CIS scheme banner. This includes work on such activities as:
- site preparation
- alterations
- dismantling
- construction
- repairs
- decorating
- demolition
If the subcontractor's job isn't solely construction, i.e., working on both construction and non-construction-related tasks for the same contractor, then the CIS ruling will prevail, and all jobs they do for that contractor will be CIS taxed.
Who the CIS scheme doesn't apply to
There are certain categories of subcontractors who fall outside of the HMRC CIS scheme. Architects and surveyors, for instance, aren't subject to it, neither are those who provide scaffolding hire or carpet fitting. Manufacturers of materials don't count, neither do those contracted to deliver those same materials. Site workers who supply catering or other facilities, such as security or medical help, are also exempt from the CIS scheme.
What if I'm a contractor who also works as a subcontractor?
Under the rules of the HMRC CIS scheme, there will be instances when a contractor will be sending a subcontractor's CIS contribution to HMRC while, at the same time, getting money deducted by another contractor – one they have been working for as a subcontractor.
This situation is often too much of a financial hit for a single contractor and could have a detrimental effect on their cash flow, to the extent it might even risk the future of their business. If this is you, it's worth contacting HMRC and asking if you can be assessed under their 'gross status' scheme. Provided you meet the HMRC criteria, you could ask the contractor you are working for not to deduct CIS tax from your own 'payments'
Get in touch
Are you a contractor thinking about taking on subcontractors and are unsure what to do about the CIS accounting side? Then get in touch with our team at Keith Graham Chartered Accountants today. Tel: 01252 312561 or email via info@keith-graham.co.uk.