Construction Industry Scheme - What is CIS?
CIS stands for Construction Industry Scheme, which contains rules set out by HMRC on how subcontractors working within the construction industry should be paid, and how construction workers should invoice and account for VAT.
Learn more about the different types of invoices for construction workers.
Under the CIS scheme, a percentage of the payment from a contractor to a registered subcontractor is deducted and transferred to HMRC.
How CIS works
If you’re a subcontractor, which many small businesses and sole traders are in the UK construction industry, then it’s necessary to register with HMRC. If your business plans to use the skills of subcontractors, not as employees, then it’s also necessary to first register with CIS.
If you have a company and decide to use a subcontractor who is CIS registered, it’s your responsibility to account for their tax. Currently, 20pc tax is deducted from the subcontractor’s fee and should be stated on the invoice. For unregistered subcontractors, 30pc is deducted.
This will normally be held in your accounts and posted to a holding account that provides details on the subcontractor. It will then be paid to HMRC the following month. These deductions are counted towards the pay for the subcontractor and also contribute to their income tax and National Insurance.
Complying with CIS
CIS was introduced to decrease the opportunities for tax evasion in the construction industry. As a company registered to use the services of a subcontractor, it’s important to adhere to the responsibilities, including recording the transactions and submitting monthly returns to HMRC.
It’s crucial that you notify anyone within your company who deals with the business transactions on a daily basis of the obligations to record these transactions and payments correctly.
For more information and to safeguard that you, as a company, are currently complying with all regulations concerning CIS, visit the HRMC website.
Making payments on CIS
If your business finds itself in a period where you’re not planning to use the services of any subcontractors, you should request for your status to be changed to ‘inactive’ so that you don’t receive any returns for that period.
If your business already employs people and uses PAYE, you can still register for CIS if you plan to hire subcontractors. HMRC assists in getting accounts set up correctly to work with both PAYE and CIS.
CIS Invoices
CIS subcontractor invoices will need to include the CIS deduction to show how much is being deducted and transferred to HMRC. This is usually included in the cost breakdown above the total amount due.
As of March 2021, the domestic reverse charge will apply for the majority of construction transactions. Construction workers will need to apply the reverse charge to their invoices which means that the buyer will account for VAT rather than the supplier.