Here's what you need to know as an employer or contractor paying subcontractors registered for CIS, how to make the correct deductions and where to submit to HMRC
The Construction Industry Scheme (CIS) is a tax deduction scheme for construction work in the United Kingdom. Under it, contractors deduct money from a subcontractor’s payments to be passed onto His Majesty’s Revenue and Customs (HMRC). These CIS deductions would then count towards the subcontractor’s tax and National Insurance.
Registering with the CIS as a contractor is a legal requirement. However, while CIS registration may be optional for subcontractors, doing so is largely beneficial to them as they will receive lower deductions than from employers paying subcontractors directly.
For contractors, understanding the tax system may be complicated. However, if you are an employer working with subcontractors you may be required you to comply with CIS. Here’s what you need to know about the Construction Industry tax deduction scheme.
CIS applies to those working in the construction industry. However, they do not apply to employees, but rather to self-employed workers or subcontractors. If workers fall under the latter category, you must withhold tax from their payments and pass it on to HMRC, also known as CIS deductions.
With that said, contractors have the responsibility of deciding whether their workers are employed or self-employed. Workers who work exclusively for one contractor, who bear none of the risks of running a business, are likely to be an employee. If your workers are regarded as employees, then you will withhold income tax rather than CIS at source. There are certain CIS exemptions and CIS exempted activities that are covered on the HMRC CIS info page
The amount for employer CIS deductions will be dependent on the subcontractor you are paying through the scheme. Some subcontractors registered with CIS may have applied for gross payment status, which means that you will not be deducting anything from their payment. Instead, the subcontractor will receive their payment in full and then pay all their National Insurance and income tax to HMRC at the end of the financial year.
Registered CIS subcontractors that don’t qualify for gross deductions will have tax deducted at 20%, while those who are not registered under the construction industry scheme will have 30% deductions.
If you need to verify if a subcontractor is registered with CIS then you can Sign in to the Construction Industry Scheme (CIS) online service. Or if you need more info on how to deduct CIS payments or pay subcontractors you can ask the HMRC’s digital assistant or call the HM Revenue and customs CIS helpline but you will need to have your government gateway ID as well as having added CIS to your business account.
After receiving an invoice from a subcontractor, contractors must calculate the gross amount, qualifying materials, and deductions. Make the deductions based on the subcontractor’s status with HMRC, which you might need to verify yourself. The deductions will be multiplied by the gross amount. This will be 20% or 30% depending on whether the subcontractor is registered under CIS. You can find examples of CIS calculations here.
When calculating your payment to the subcontractor, qualifying materials are excluded from the gross amount. It’s a hot topic as we’d all like to get our travelling expenses a bit lower these days. Accounting Web has some great forum discussions that shed a bit more light on CIS exemptions These materials are defined as any costs that the subcontractor has incurred under your contract. If the subcontractor is VAT-registered, then you will exclude VAT from any deductions you make as well.
Once you’ve made the deductions, make the net payment to the subcontractor with a complete record of materials, deductions, and payments. You would then pay the deduction to HMRC regularly. This can generally be done either monthly or quarterly.
Fortunately for contractors, payments can now be automated, as well. Finance companies in the new normal are investing in digital transformation and automation. This allows them to quickly sift through massive data sets to help provide accurate information.
The CIS can make your payment calculations more challenging. However, knowing how the scheme works can be largely beneficial in remaining CIS compliant. And with more advanced tools to automate your computations, this can significantly reduce the strain on your company.
bluQube’s integrated CIS tools were made specifically for our Construction Clients to help contractors by automatically deducting HMRC payments from payments to subcontractors. This can help you stay CIS-compliant with an automated calculation and payment process that ensures accuracy and efficiency.
Thank you to Jolene Simmons for writing and submitting this useful article on paying individuals in the construction industry. Find out more about bluQube's CIS accounting tools here or speak to one of our team for more info on the 2022's best cloud finance system - as voted by computing.co.uk's cloud excellence awards