The Construction Industry Scheme, or CIS for short, is a tax deduction system which ensures that contractors correctly handle tax payments for subcontractors. The scheme help regulate tax compliance and prevent tax evasion by requiring tax deductions at the source.
Who Needs to Register for CIS?
The Construction Industry Scheme applies to both contractors and subcontractors.
Contractors must register for CIS before hiring their first subcontractor. This applies if they either:
- Pay subcontractors for construction work
- Run a business that does not primarily focus on construction but has spent over £3,000,000 on construction within 12 months
Subcontractors are not required to register, but those who don’t will have deductions taken from their payments at a higher rate. Registered subcontractors have 20% deducted, while unregistered ones face a 30% deduction.
What Work Falls Under the Construction Industry Scheme?
CIS applies to most construction work, including:
- Building projects
- Site preparation, such as laying foundations
- Alterations, repairs and decorating
- Demolition and dismantling
- Installing heating, lighting, power, water and ventilation systems
- Cleaning buildings after construction
However, certain types of work are exempt from CIS, including:
Contractors’ Responsibilities Under CIS
1. Registering for the Construction Industry Scheme
Before hiring subcontractors, contractors must register for CIS with HMRC and receive a PAYE reference number.
2. Verifying Subcontractors
Before making payments, contractors must verify subcontractors with HMRC to determine the correct tax deduction rate. Contractors can complete verification online through HMRC’s CIS system or commercial CIS software.
3. Deducting Tax from Payments
Once verified, contractors must deduct tax from subcontractors’ payments at one of the following rates:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% for subcontractors with Gross Payment Status
These deductions count as advance tax payments for the subcontractor.
4. Filing Monthly Returns
Contractors must submit monthly CIS returns to HMRC, detailing payments made to subcontractors and deductions withheld. They must then file these returns by the 19th of each month to avoid penalties.
5. Issuing Payment and Deduction Statements
Each month, contractors must provide subcontractors with a CIS payment statement, outlining the payments made and the tax deducted.
Subcontractors’ Responsibilities Under CIS
1. Registering for the Construction Industry Scheme
While optional, registering for CIS reduces tax deductions from 30% to 20%.
2. Keeping Payment Records
Subcontractors must retain CIS payment statements as proof of tax deductions.
3. Claiming Tax Refunds
If the contractor has deducted too much tax, subcontractors can claim a refund when filing their Self Assessment tax return.
Gross Payment Status
Subcontractors can apply for Gross Payment Status, while allows them to receive full payments without CIS deductions. To qualify, they must meet HMRC’s criteria, including a history of timely tax payments and financial stability.
How to Register for the Construction Industry Scheme
Contractors can register as a new employer with HMRC and then select the CIS option.
Subcontractors can register through HMRC’s online services using their Unique Taxpayer Reference.
For non-UK businesses operating within the UK, the same CIS rules apply, but a different registration process is required to comply with UK tax laws.
CIS Penalties for Non-Compliance
Failing to comply with the Construction Industry Scheme regulations can lead to penalties. Late CIS returns result in fines:
- 1 day late = £100 fine
- 2 months late = £200 fine
- 6 months late = £300 fine or 5% of deductions (whichever is higher)
- 12 months late = Additional fines up to £3,000
Contractors who fail to verify subcontractors or deduct the correct tax amount can also face penalties.
How to Deregister from CIS
If a contractor or subcontractor stops working in construction, they must inform HMRC to deregister from the Construction Industry Scheme. This ensures they are no longer have to submit returns or make tax deductions.
If work is paused temporarily, an inactivity request can be made for up to 6 months to avoid unnecessary compliance obligations.
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