What is the Construction Industry Scheme?

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax system implemented by HM Revenue & Customs (HMRC) to govern how tax is deducted from payments made to subcontractors in the construction industry. It was introduced to ensure that the construction industry pays its fair share of tax, while also streamlining the process for contractors and subcontractors. Whether you are a contractor or a subcontractor, understanding how CIS works is essential for staying compliant with UK tax regulations.

Under CIS, contractors are responsible for deducting tax from payments made to subcontractors for construction work. The deductions are then passed on to HMRC. This system is in place to ensure that subcontractors meet their tax obligations, which are usually paid directly to HMRC through these deductions, rather than waiting for annual tax returns.

What is CIS Tax?

CIS tax refers to the tax that contractors are required to deduct from payments made to subcontractors for construction work. The amount of tax deducted depends on whether the subcontractor is registered under the Construction Industry Scheme.

• Registered Subcontractors: If a subcontractor is registered with CIS, the contractor is required to deduct 20% of the total payment as tax. This rate is based on the understanding that the subcontractor is compliant with their tax obligations and is likely to be paying the correct amount of tax.
• Unregistered Subcontractors: If a subcontractor is not registered with the scheme, the tax deduction is set at a higher rate of 30%. This is because HMRC has no guarantee that the subcontractor is fulfilling their tax obligations, and thus a higher deduction is enforced.

The deductions are made from the payments to the subcontractor and are forwarded to HMRC. The subcontractor can then claim credit for the CIS tax paid when they file their self-assessment tax return. Essentially, CIS tax serves as a prepayment towards the subcontractor’s end-of-year tax bill.

It is important to note that the tax deducted under CIS is not an additional charge or fee to the subcontractor. Instead, it is simply a way to ensure that tax is collected incrementally during the year, rather than in a lump sum at the end of the tax year.

What are CIS Payments?

CIS payments refer to the payments made by contractors to subcontractors for construction-related work. However, unlike standard payments, the contractor must make deductions before paying the subcontractor. This process ensures that tax is collected at the time of payment and sent directly to HMRC.

For example, if a contractor agrees to pay a subcontractor £2,000 for work completed on a construction site, and the subcontractor is registered under CIS, the contractor would deduct 20% (£400) from the payment, leaving the subcontractor with £1,600. The £400 is then sent to HMRC as a tax prepayment on behalf of the subcontractor.

If the subcontractor is not registered, the contractor would deduct 30% (£600) from the payment, leaving the subcontractor with £1,400. This higher deduction is because the subcontractor has not provided HMRC with evidence of tax compliance.

These CIS payments serve both as a way for HMRC to collect tax from subcontractors and as a method to prevent tax evasion in the construction industry, which can often involve informal and cash-in-hand payments. It is essential for contractors to ensure that they are deducting the correct amount based on whether the subcontractor is registered with CIS.