CIS Contractors: Your Guide to the Construction Industry Scheme

If you operate as a contractor in the construction industry, it's essential to understand and follow the Construction Industry Scheme (CIS) rules set by HM Revenue and Customs (HMRC). This guide will help you navigate your obligations under CIS.

When Do CIS Rules Apply to You?

The CIS rules generally apply to your business if:

• You pay subcontractors to do construction work for you.
• Your primary business does not involve construction work, but you have spent more than £3 million on construction in the past 12 months (e.g., property developers).

The CIS rules typically do not apply to you if:

• You are a private householder who hires subcontractors for your own home (not for business purposes).
• You only do certain jobs that are not considered construction work under CIS, such as architecture, surveying, scaffolding hire (without labour to erect/dismantle), carpet fitting, making or delivering materials, or running a canteen on a construction site.

In essence, with some specific exceptions, if you provide construction work for an end client, you are classified as a Contractor. And, with the same exceptions, anyone you hire to complete construction work to fulfil your construction contract with the end client is typically considered a Subcontractor.

Your Obligations as a CIS Contractor

As a contractor operating under CIS, you have several key obligations:

• Register with HMRC as a contractor before you take on your first subcontractor.
• Check the employment status of your subcontractors and verify them with HMRC.
• Make correct deductions from your subcontractors’ payments and pay these deductions to HMRC.
• Submit monthly CIS returns to HMRC.
• Keep accurate records of all your payments and deductions.
• Provide payment and deduction statements to your subcontractors.

How to Check and Verify Your Subcontractors

Before you make any payment to a subcontractor, you need to check their employment status and verify them with HMRC. This is crucial to ensure they are properly registered with CIS and that you apply the correct rate of tax deduction.

Important: You must collect subcontractor information and verify them BEFORE making any payments to them!

• Check Employment Status: You can determine the employment status of your subcontractors using HMRC's official Check Employment Status for Tax (CEST) tool or by following the guidance in the employment status manual. Be aware that you may face penalties if you treat someone as a subcontractor when they should legally be an employee.
• Verify with HMRC: You can verify your subcontractors online using the CIS online service (via your Government Gateway account) or by calling the CIS helpline. You will typically need:
  • Your contractor UTR number
  • The subcontractor’s name, UTR number, and National Insurance number (or company registration number if they are a limited company)

HMRC will then inform you of the correct rate of deduction to use for each subcontractor. There are three possible rates:

• 0% (Gross Payment Status): If the subcontractor has registered for gross payment status, it means they have demonstrated a good record of tax compliance and will pay their own tax and National Insurance directly to HMRC.
• 20% (Standard Payment Status): If the subcontractor has registered for standard payment status, it means they have passed some basic tests on their business turnover, tax compliance, and business structure. This is the most common deduction rate.
• 30% (Unregistered/Non-Compliant): If the subcontractor has not registered with CIS or has not provided correct details, you must deduct tax at the higher rate of 30%.

How to Make Deductions and Pay HMRC

When you pay a subcontractor for construction work, you are required to deduct tax from their payment and pay it to HMRC. It is important to note that the deduction only applies to the labour part of the payment, not to the cost of materials, VAT, or certain specific expenses.

You can calculate the amount of deduction using this formula:

Deduction = (Payment - Cost of materials - VAT) x Rate of deduction

You must pay the total deductions to HMRC every month by the 22nd (or the 19th if paying by post) after the end of the tax month in which the payments were made.

How to Submit Monthly Returns and Keep Records

You have to submit a monthly CIS return (CIS300) to HMRC by the 19th of each month following the month in which you made payments to subcontractors. You can submit your return online using the CIS online service or by sending a paper form CIS300.

Your monthly return must include:

• Your contractor UTR number
• The month covered by the return
• The total amount of payments made to all subcontractors
• The total amount of deductions made from all payments
• The detailed information for each subcontractor, including their name, UTR number, verification number, gross payment, cost of materials, deductions made, and net payment.

You must keep comprehensive records of all your payments and deductions for at least three years after the end of the tax year they relate to.

How to Give Payment and Deduction Statements to Your Subcontractors

You are legally required to give a payment and deduction statement to each subcontractor within 14 days of the end of each tax month in which a payment was made. The statement must clearly show:

• Your name and business address
• The subcontractor’s name and UTR number
• The payment date
• The gross payment amount
• The cost of materials (if applicable)
• The deductions made
• The net payment amount

How We Help: SGL Accountancy's CIS Services

When we handle your CIS Scheme, we provide comprehensive support to ensure your compliance:

• We complete subcontractor verification once you have determined the worker's employment status and collected the necessary information from them.
• We produce subcontractor payslips and statements based on the information you provide on materials, labour, and VAT.
• We submit Monthly CIS Returns to HMRC once they have been approved by you.
• We provide payroll summaries to enable seamless entry into your accounting system.

**Note:** The above information is a general guide. CIS rules can be complex, and specific situations may vary. We recommend seeking professional advice for your individual circumstances. The tax year information and deduction rates are current as of August 2023, but always check the latest HMRC guidance.