If you work in the construction industry or plan to, you’ve probably come across the term Construction Industry Scheme (CIS) tax. This is a unique tax system that applies specifically to the construction sector. If you’re looking for a clear explanation of what CIS is, its purpose, and how it functions, you’re in the right place.

Here are the key points:

CIS Tax Overview:

• The Construction Industry Scheme (CIS) tax is designed to simplify tax processes within the construction industry.
• Subcontractors are not required to register, but if they don’t, higher tax deductions are taken from their payments.
• Both contractors and subcontractors can register for CIS through the HMRC website.
• Some construction jobs are exempt from CIS, even if a contractor is involved.
• CIS tax is paid by contractors who deduct taxes from their subcontractors’ paychecks.
• If you’re entitled to a CIS refund, you can claim it online or by mail.
• It’s important to note that CIS tax is distinct from your Self-Employment tax and should be managed separately.

Here’s what we’ll cover:

What is CIS Tax?

Who Must Sign Up for CIS?

How to Register Under the Construction Industry Scheme

Who is Exempt from CIS?

Example of CIS Tax

How to Make a CIS Refund Claim

The Construction Industry Scheme (CIS) vs Self-Employment Tax

Conclusion

Frequently Asked Questions 

CIS Tax is a specific tax scheme in the United Kingdom designed for the construction industry. Its primary goals are to support construction businesses in boosting their revenue and to combat tax evasion within the sector.

The government introduced this separate tax scheme due to historical tax-related issues in the construction industry. Because construction work often involves temporary engagements, tax reporting has been prone to errors, whether unintentional or deliberate. The CIS tax scheme was established to facilitate easier and more accurate reporting of taxable income by construction workers.

As for who should register for CIS, here are the main points:

1. Contractors: Contractors, which can include businesses (whether public or private limited companies) and individuals working as contractors, are legally obligated to register for CIS. This requirement also applies to property developers, building firms, and anyone offering construction services, even if construction is not their primary business focus.
2. Subcontractors: While subcontractors are not obliged to register for CIS, many choose to do so because it offers a tax discount. Registered subcontractors have their tax deductions calculated at a rate of 20%, while unregistered ones face a higher deduction rate of 30%.

It’s worth noting that individual employees working for a construction company are not individually required to register for CIS. Instead, it’s the responsibility of the company itself to comply with CIS regulations.

To register under the Construction Industry Scheme (CIS), the process differs for contractors and subcontractors:

For Contractors:

1. Go to the HMRC website and visit the “www.gov.uk/register-employer“ page to register as an employer.
2. Follow the online registration process if you are a limited company with 1-9 directors. If your situation is different, contact HMRC for guidance.
3. Set up your PAYE registrations.
4. Determine the benefits you need to offer to your employees.
5. Secure employer’s liability insurance.
6. Once you’ve completed these steps, HMRC will send you a letter containing the necessary information to start hiring subcontractors under CIS.

For Subcontractors:

1. Register as self-employed, typically as a sole trader.
2. During the registration process, provide essential information such as your legal business/trading name, National Insurance Number, unique taxpayer reference number (UTR) for your business, and VAT registration number if applicable.
3. If you don’t have a UTR, you may need to register for self-assessment first.
4. Complete your CIS subcontractor registration online using the appropriate HMRC website.

It’s important to understand that as a construction professional, you may use both CIS and self-assessment for your financial affairs. If you work with registered contractors, they will pay you under CIS. If you work for individuals or entities outside the construction sector, you’ll use your self-assessment details to declare your earnings. CIS complements self-employment tax reporting rather than replacing it.

Here are the steps to register as a contractor and subcontractor under the Construction Industry Scheme (CIS):

For Contractors:

1. Mandatory Registration: Every contractor is legally required to register under CIS as per HMRC regulations. This is not optional.
2. Registration Process:
   • Go to the HMRC website, specifically the “www.gov.uk/register-employer“ page, to initiate the registration process.
   • If your business is a limited company with 1-9 directors, you can follow the online registration process provided on the website. If your situation is different, you should contact HMRC for guidance.
3. Set Up PAYE Registrations: After registration, set up your Pay As You Earn (PAYE) registrations. This is essential for managing payroll and tax deductions.
4. Employee Benefits: Determine what benefits you must offer to your employees in accordance with legal requirements.
5. Employer’s Liability Insurance: Secure employer’s liability insurance, which is mandatory to protect your employees.
6. HMRC Letter: Once you have completed all the necessary steps, HMRC will send you a letter containing the information you need to start hiring subcontractors under CIS. This letter serves as confirmation of your CIS registration.

For Subcontractors:

1. Optional Registration: Subcontractors are not obligated to register for CIS taxes, but it often makes financial sense to do so.
2. Registration Process:
   • Register as self-employed, typically as a sole trader. This process establishes your status as a self-employed subcontractor.
3. Required Information:
   • During the registration process, you will need to provide the following information:
     • Your legal business/trading name.
     • Your National Insurance Number (NIN).
     • The unique taxpayer reference number (UTR) for your business.
     • Your VAT registration number if your business is VAT-registered.
   • If you do not have a UTR, you may need to register for self-assessment first.
4. Complete CIS Subcontractor Registration: Complete your CIS subcontractor registration online using the specific HMRC website designated for this purpose.

It’s important to understand that as a construction professional, you may use both CIS and self-assessment for tax purposes. If you work with registered contractors, they will pay you under CIS, and tax deductions will be made accordingly. However, if you work for individuals or entities outside the construction sector, you will use your self-assessment details to declare your earnings.

In essence, CIS complements your self-employment tax reporting; it doesn’t replace it. You’ll manage both aspects to ensure compliance with tax regulations in the construction industry.

Certain types of work within the construction industry are exempt from the Construction Industry Scheme (CIS). This exemption is primarily based on the nature of the project rather than the individuals or entities involved. Here are some examples of work that falls under this exemption:

1. Construction Projects Costing Less than £1,000 (excluding materials): Any construction project with a total cost of less than £1,000 (excluding the cost of materials) is exempt from CIS.
2. Projects Funded by a Charity: Construction work that is funded by a charity is also exempt from CIS. This exemption recognizes the charitable nature of the project.
3. Construction on Your Own Property for Your Own Business Use: If you are performing construction work on a property that you own and intend to use for your own business purposes (excluding properties intended for sale or rent), it is exempt from CIS.
4. Specific Services: Some specific services within the construction industry are exempt from CIS. These services include architecture, carpet fitting, and scaffolding hire.

It’s important to note that these exemptions are related to the characteristics of the construction project and the services provided rather than the status of the individuals or businesses involved. If a project falls under one of these exempt categories, CIS tax deductions would not apply.

Regarding the example of CIS tax calculations, your explanation is accurate. Contractors deduct money from subcontractors’ pay as per CIS rules, and the deduction rates differ based on the subcontractor’s registration status. If a subcontractor is registered under CIS, the deduction rate is 20%, while unregistered subcontractors face a higher deduction rate of 30%.

For instance, if you agreed to pay Bobby, the subcontractor, £1,000 for his work:

• If Bobby is a registered subcontractor:
  • 20% of £1,000 = £200
  • Bobby receives £1,000 – £200 = £800 after tax.
• If Bobby is an unregistered subcontractor:
  • 30% of £1,000 = £300
  • Bobby receives £1,000 – £300 = £700 after tax.

Contractors are required to report these deductions in their monthly returns to HMRC. Subcontractors can then use this information to claim their own tax deductions when filing their annual Self-Assessment tax return.

To make a CIS refund claim online, follow these steps:

1. Sign into Government Gateway Account: If you already have a Government Gateway account, sign in to it. If not, you’ll need to register for an account to claim refunds online.
2. Claim Your Repayment: Once logged in, navigate to the relevant section for tax refunds or claims. Select the option to claim a CIS refund.
3. Provide Required Information: Follow the prompts to provide the necessary information for your refund claim. This may include details about your income, deductions, and any relevant documents.
4. Submit Your Claim: Review the information you’ve provided, ensure it’s accurate, and then submit your refund claim through the online system.

It’s important to note that you are not obligated to file your CIS refund claim online. HMRC also accepts refund claims by post. If you prefer to file your claim by mail, follow these steps:

1. Prepare Your Claim: Ensure you have all the necessary documents and information to support your refund claim.
2. Mark Your Claim as CIS: Clearly indicate that your claim is related to CIS (Construction Industry Scheme).
3. Mail Your Claim: Send your claim to the following address:

   PT Operations North East England HM Revenue and Customs BX9 1BX United Kingdom

4. Timely Submission: Be mindful of the deadline for claiming CIS refunds. Ensure that your claim is submitted before the annual April 5th tax deadline. Filing after this deadline may result in your refund not being recorded for the previous tax year.

Regarding the difference between the Construction Industry Scheme (CIS) and self-employment tax:

• In the traditional self-employment model, you are paid the gross amount of income by your contractor or client, and it’s your responsibility to declare your earnings to HMRC for tax and National Insurance calculations.
• CIS simplifies this process by allowing your contractor to deduct tax and National Insurance directly from your pay, so the amount you receive is already net of these deductions. This simplifies your tax obligations.

To qualify for CIS, consider the following:

• Your self-employment status must be verified. Not everyone in the construction industry is self-employed, and some may have traditional working contracts.
• CIS applies to a diverse range of construction work, not just building and scaffolding. It includes services like demolition, repair, and decorating work.
• You can access the CIS tax scheme only through registered contractors. If a homeowner hires you for construction work, they are required to pay you the full invoice amount.
• The amount of tax deducted by the contractor depends on your registration status. If you’re registered under CIS, the deduction rate is 20%. If not, it’s 30%. Subcontractors are not required to register for CIS, but contractors who hire them must be registered. If you both hire subcontractors and work as one, you must register as both a contractor and subcontractor under CIS.

In conclusion, while CIS simplifies tax deductions in theory, it can become complex in practice due to various payments and compliance requirements. Using accounting software like FreshBooks can help streamline your financial management, especially when dealing with CIS-related transactions and reporting.

What are the benefits of CIS tax registration?

• For contractors, CIS registration is not optional; it’s a legal requirement. Contractors must deduct tax from subcontractors’ payments and report these deductions to HMRC.
• Subcontractors benefit from CIS registration as it typically results in lower tax deductions from their paycheques (20% compared to 30% for unregistered subcontractors). This means more money in hand for registered subcontractors.

What are the penalties for non-compliance with CIS tax regulations?

• Penalties for non-compliance with CIS tax regulations can include:
  • A fixed penalty charge of £100 for filing one day overdue.
  • A second fixed penalty of £200 for being two months overdue.
  • Further penalties, which can be the greater of £300 or 5% of any tax liability for being six months overdue.
  • For a one-year delay, penalties may vary but could include up to 100% of any tax liability or a minimum penalty of £1,500 or £3,000.
• Penalties can increase if there is evidence of deliberate withholding of tax claims.

What are the rules for subcontracting work outside the UK?

• CIS applies to all construction jobs done in or out of the UK. If you are a UK contractor, you must comply with CIS regulations, regardless of where the work is performed.
• Non-UK contractors who hire UK-based subcontractors must also register for CIS and follow CIS rules for those subcontractors, irrespective of their location.

Can I appeal against CIS tax assessments or penalties?

• Yes, you have the right to appeal if you disagree with a CIS penalty. To appeal:
  • You can appeal online through the HMRC’s online portal.
  • You can provide new information to your HMRC officer.
  • You can consult a different HMRC officer for a second opinion.
  • You can arrange for an independent tribunal to review your case.

What are the CIS tax rules for public sector contracts?

• There is no distinction in CIS rules between the public and private sectors within the construction industry. All contractors and subcontractors in the construction sector must adhere to the same CIS requirements. There are no additional tax implications within the CIS scheme based on your status as a public limited company or the type of sector (public or private) in which you operate.

These answers provide an overview of key aspects of CIS tax and its regulations. It’s important to consult with HMRC or a tax professional for specific and up-to-date guidance regarding your individual circumstances and compliance requirements.