What is Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax deduction system in the UK, which governs how payments to subcontractors for construction work must be handled by contractors in the industry.
Under the scheme, contractors are obligated to deduct money from a subcontractor’s payments and pass it to HM Revenue & Customs (HMRC). These deductions serve as advance payments towards the subcontractor’s tax and National Insurance.
Who Needs to Comply?
CIS covers most construction work, including site preparation, alterations, dismantling, construction, repairs and decorating. It applies to all contractors and subcontractors working in the UK construction industry, including companies, partnerships, and the self-employed.
If you are a contractor, you must register for the scheme. Subcontractors are not required to register, but it is highly beneficial if they do, as it affects how taxes are deducted from their payments.
Key Components of CIS
Once registered, contractors have several responsibilities under CIS. Here are some of the key components:
- Registration: Contractors must register for CIS before they start work. Subcontractors, while not required to register, will benefit from doing so because registered subcontractors are taxed at a lower rate than unregistered ones.
- HMRC CIS Helpline: 0300 200 3210.
- Verification: Before making any payments to a subcontractor, the contractor needs to verify them with HMRC. This process determines the correct rate of tax deduction.
- Tax Deductions: There are three rates of tax deductions under CIS:
- Standard Rate: 20% for registered subcontractors.
- Higher Rate: 30% if the subcontractor is not registered.
- Zero Rate: Applies to subcontractors who hold Gross Payment Status, meaning no deductions are made.
- Monthly Returns: Contractors are required to submit monthly returns to HMRC that detail all the payments made to subcontractors, along with the deductions withheld.
- Issuing CIS Statements: Contractors are required to issue subcontractors with a CIS Statement, which is vital for their tax records.
These responsibilities ensure both compliance with the scheme and that subcontractors are paid appropriately after tax deductions.
Benefits of CIS
The primary advantage of CIS is its structured approach to tax handling within the construction sector. By deducting tax at the source, it reduces the likelihood of tax evasion and ensures that the tax liabilities of subcontractors are systematically reduced by the amount already deducted throughout the year.
Special Cases and Exceptions
While CIS covers a broad range of construction activities, there are exceptions and special cases. Not all types of work are included under CIS; for example, architecture, surveying, and carpet fitting are exempt.
Delivering materials and providing certain non-construction services onsite (like running a canteen) also fall outside the CIS framework.
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