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Under CIS, contractors are required to deduct tax from payments made to subcontractors and pay those deductions directly to HMRC. The deductions count towards the subcontractor's income tax and national insurance liabilities.
The scheme applies to most construction work, including:
- Building and construction work
- Alterations, repairs and extensions
- Demolition and dismantling
- Site preparation and groundworks
- Decorating and finishing work
- Installation of systems for heating, lighting, power, water and ventilation
Property developers, landlords undertaking significant developments, and businesses spending substantial amounts on construction projects may also fall within the scope of CIS.
Does CIS apply to you?
To determine whether CIS applies, three key elements need to be present:
- There is a contractor.
- There is a subcontractor.
- Construction operations are being carried out.
Who is a contractor under CIS?
A contractor is any business or individual that pays subcontractors for construction work. Contractors have the primary responsibility for operating the CIS correctly.
Who is a subcontractor under CIS?
A subcontractor is a business or individual that carries out construction work for a contractor.
Being a subcontractor does not automatically mean you are self-employed. Please see the section below, which covers factors related to employment status.
Both contractors and subcontractors can operate as sole traders, partnerships, limited companies or LLPs.
CIS Contractor Responsibilities
If you are a contractor, you have several obligations under CIS, namely:
- Verify subcontractors
Before making the first payment, you must verify the subcontractor with HMRC. Verification confirms whether payments should be made:
- Gross (0% deduction)
- Net with a 20% deduction
- Net with a 30% deduction for unregistered subcontractor.
- Make correct deductions
Where deductions are required, you must calculate and withhold the appropriate amount before making payment.
- Submit monthly CIS returns
As a contractor, you must submit a CIS return to HMRC detailing: Payments made to subcontractors, deductions withheld, and verification details. Returns are due by the 19th of the following month.
- Provide payment statements
Subcontractors must receive a deduction statement showing the amount paid and any CIS tax withheld.
CIS Subcontractor responsibilities
If you’re a subcontractor, your responsibilities under the scheme are:
- Registering for CIS
Although registration is not compulsory, failing to register usually results in a 30% deduction rather than 20%.
- Maintaining accurate records
You should keep records of invoices issued, CIS deduction statements received, business expenses and tax and VAT records.
- Consider gross payment status
Some subcontractors may qualify for Gross Payment Status (GPS), allowing them to receive payments without deductions being made.
To qualify, businesses must meet HMRC's turnover, compliance and business tests. Gross Payment Status can provide significant cash flow benefits but must be maintained through ongoing compliance.
Employment status and CIS
One common misconception is that anyone working under CIS is automatically self-employed. This is not the case. HMRC will look at factors such as:
- Who controls how the work is carried out
- Whether a substitute can be provided
- Financial risk and responsibility
- Provision of equipment and materials
- Whether there is an ongoing obligation to offer and accept work
Getting employment status wrong can lead to significant tax liabilities, so it is important to review working arrangements carefully.
VAT and other tax considerations under CIS
Many businesses operating under CIS may also be affected by the VAT Domestic Reverse Charge for construction services. This changes how VAT is accounted for in certain construction transactions and can significantly impact cash flow and invoicing procedures.
Contractors and subcontractors should also ensure they understand their wider tax obligations, including VAT registration, corporation tax, income tax and payroll requirements where applicable.
Need Advice on CIS?
The Construction Industry Scheme can be complex, particularly where employment status, Gross Payment Status, VAT treatment and compliance obligations overlap.
If you are unsure whether CIS applies to your business, or would like help reviewing your procedures, contact the team at UHY Peninsula on 01566 777189 or email enquiries@uhy-peninsula.com. We can help you understand your responsibilities, remain compliant and avoid costly mistakes.
