CIS Subcontractors: Your Guide to the Construction Industry Scheme

If you perform construction work for a contractor, you need to understand and follow the Construction Industry Scheme (CIS) rules set by HM Revenue and Customs (HMRC). This guide explains your role and responsibilities as a CIS subcontractor.

When Do CIS Rules Apply to You?

The CIS rules apply to you if:

• You do construction work for a contractor.
• Your primary business does not involve construction work, but you have received payments for construction work from a contractor in the past 12 months.

The CIS rules generally do not apply to you if:

• You are an employee of the contractor (your status should be determined by HMRC's employment status rules).
• 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 short, if you are hired to complete construction work in pursuit of fulfilling a contractor's construction contract with an end client, you are typically classified as a Subcontractor.

What are Your Benefits as a Subcontractor under CIS?

While CIS involves deductions, there are also benefits for subcontractors:

• You can reduce your overall tax liability by claiming deductions for the cost of materials, VAT (if applicable), and certain allowable expenses when you file your Self Assessment tax return.
• You can receive payments from contractors without any deductions if you successfully register for gross payment status (see below for details).
• By correctly following CIS rules and submitting your Self Assessment tax return on time, you can avoid paying too much tax or National Insurance and claim any reliefs or allowances you're entitled to.

How to Get Verified by Contractors

Before a contractor can pay you for construction work, they are legally required to verify your details with HMRC. This ensures you are registered with CIS and that they apply the correct rate of tax deduction to your payments.

You need to provide the contractor with:

• Your name and Unique Taxpayer Reference (UTR) number.
• Your National Insurance number (if you are a sole trader or a partner), or your company registration number (if you are a limited company).

HMRC will then inform the contractor of the rate of deduction to use for your payments. There are three possible rates:

• 0% (Gross Payment Status): This means you have registered for gross payment status, indicating you have a good record of tax compliance and will pay your own tax and National Insurance directly to HMRC.
• 20% (Standard Payment Status): This is the most common deduction rate, applied if you are registered with CIS but do not have gross payment status.
• 30% (Unregistered/Non-Compliant): This higher rate is applied if you have not registered with CIS or have not provided the contractor with correct details.

How to Register as a Subcontractor under CIS

You can register as a subcontractor online using the CIS online service (via your Government Gateway account) or by calling the CIS helpline. You will need to provide:

• Your business name and address.
• Your Unique Taxpayer Reference (UTR) number.
• Your National Insurance number (if you are a sole trader or a partner).
• Your company registration number (if you are a limited company).
• The name and UTR of any partners or directors (if applicable).

How to Receive Payments and Deductions from Contractors

When a contractor pays you, they may deduct tax from your payment and pay it to HMRC. This deduction only applies to the labour part of the payment, not to the cost of materials, VAT (if applicable), or certain expenses.

The deduction amount is calculated using this formula:

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

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

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

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, as these are vital for your Self Assessment tax return.

How to File Your Tax Return and Pay Your Tax and National Insurance

As a subcontractor, you are generally required to file a Self Assessment tax return every year by 31 January following the end of the tax year (which runs from 6 April to 5 April). For example, for the 2024/25 tax year, your return would be due by 31 January 2026.

Your tax return must include:

• Your personal details and UTR number.
• The total amount of payments received from contractors under CIS.
• The total amount of deductions made from your payments under CIS.
• The total amount of income from other sources, such as self-employment, employment, property, dividends, interest, etc.
• The total amount of expenses and allowances that you can claim against your income, such as mileage, tools, equipment, home office costs, etc.
• The total amount of tax and National Insurance that you owe or are owed (taking into account CIS deductions already made).

You have to pay your outstanding tax and National Insurance every year by 31 January following the end of the tax year. Any CIS deductions made by contractors will be offset against your total tax bill, potentially reducing the amount you owe or resulting in a refund.

How to Apply for Gross Payment Status

If you want to receive payments from contractors without any deductions, you can apply for gross payment status. This means you will receive the full payment from contractors, and you will be responsible for paying all your tax and National Insurance at the end of the year via Self Assessment.

To qualify for gross payment status, you have to pass three HMRC tests:

• Business Test: You must show that your business is run in the UK, has a bank account, and primarily does construction work or provides labour for construction work.
• Turnover Test: Your business turnover from construction work (excluding VAT and the cost of materials) must meet certain thresholds: at least £30,000 a year for sole traders or single-director companies, or £100,000 a year for partnerships and companies with more than one partner or director.
• Compliance Test: You must demonstrate that you have a good record of complying with your tax obligations, such as filing your returns and paying your tax on time.

You can apply for gross payment status online using the CIS online service or by calling the CIS helpline. HMRC will review your application and inform you of their decision. You have to renew your gross payment status every year by 5 April.

How We Help: SGL Accountancy's CIS Services

When we handle your CIS Scheme as part of your overall accounts, we provide valuable support:

• We can help you generate your sales invoices to contractors, indicating the necessary adjustments and deductions.
• We generate journals handling the CIS-related items in your accounting records.
• We accurately account for CIS deductions in your financial statements.
• We work to reduce your Self Assessment Tax Due, or claim back any overpayment of taxes, when filing your Self Assessment Tax Return.
• Where you operate as a Limited Company and we operate your payroll, we can reduce your liability of payroll taxes to offset your CIS deductions.

**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.