- 0191 466 1029
- info@findlaytodd.co.uk
- The Clervaux Exchange, Clervaux Terrace, Jarrow, NE32 5UP
Written By Amy Smith
If you work as a subcontractor in the construction industry, the Construction Industry Scheme (CIS) can affect how you are paid and how you deal with your tax.
Under CIS, contractors may deduct money from your payments before paying you. These deductions are then passed to HMRC and count as advance payments towards your tax and National Insurance. Understanding how the scheme works can help you keep accurate records, check that the correct deductions are being made and avoid problems when it is time to deal with your tax.
In this guide, we explain some of the key things subcontractors need to know about CIS tax, from registering for the scheme to claiming credit for deductions.
The Construction Industry Scheme is an HMRC scheme covering payments made by contractors to subcontractors carrying out construction work.
If you work for a contractor as a sole trader, through a limited company, or as part of a partnership or trust, you may need to consider CIS. Employees are treated differently and do not register as CIS subcontractors.
Under the scheme, the contractor verifies the subcontractor and determines the appropriate treatment of payments under CIS.
For subcontractors, this means that the amount arriving in your bank account may already have had CIS tax deducted from it.
There are three main CIS deduction rates:
20% if you are registered for CIS and successfully verified.
30% if you are not registered or cannot be verified.
0% if you have Gross Payment Status.
Importantly, CIS deductions are not simply calculated against the entire invoice in every case. Certain amounts, including VAT and qualifying amounts relating to materials and some other costs, are excluded before the CIS deduction is calculated.
If you are a registered subcontractor subject to the standard CIS deduction rate, your contractor will normally deduct 20% from the part of your payment that is subject to CIS.
This deduction is not an additional tax bill. It is an advance payment towards your eventual tax and National Insurance liability.
Subcontractors are not legally required to register for CIS, but there is an important financial reason to do so.
If you are registered and successfully verified, deductions are normally made at 20%. If you are not registered or cannot be verified, the deduction rate is normally 30%.
To register, HMRC may require information including your business name, Unique Taxpayer Reference (UTR), trading start date and VAT registration number where applicable. Other information depends on whether you operate as a sole trader, partnership or limited company.
Need help getting your CIS accounting in order? Our CIS accountants can help contractors and subcontractors understand their responsibilities and keep accurate records.
Good record keeping is particularly important under CIS.
Your contractor should provide you with a payment and deduction statement for each tax month in which deductions have been made. This shows what you have been paid and the CIS deductions taken.
HMRC advises subcontractors to keep these statements because they may be needed as evidence when reporting tax and claiming credit for CIS deductions. If you lose a statement, you should ask the contractor for a replacement.
Alongside your CIS statements, maintaining accurate records of your income and allowable business expenses will make preparing your accounts and tax return considerably easier.
One of the most common areas of confusion is what happens to all the CIS tax that has already been deducted.
The answer depends partly on how your business is structured.
If you are a sole trader or partner, you report your income and CIS deductions through your Self Assessment tax return.
You report your total pay before CIS deductions as income and record the deductions contractors have already taken. HMRC then takes those deductions into account when calculating your tax position.
If the deductions exceed the amount ultimately due, you may receive a refund. If you still owe tax after the deductions have been accounted for, you will need to pay the remaining amount.
The process is different for limited companies.
A company generally uses its payroll scheme to account for CIS deductions suffered, including reporting the relevant year-to-date amount through an Employer Payment Summary. HMRC can offset CIS deductions against amounts the company owes.
Where eligible CIS deductions remain after the end of the tax year, the company can make a claim. HMRC may use the amount against outstanding liabilities before refunding or reallocating any remaining balance.
Gross Payment Status means contractors can pay you without making CIS deductions. You then take responsibility for paying the relevant tax and National Insurance yourself.
It can help with cash flow because you receive the full eligible payment rather than having CIS deductions taken first.
However, Gross Payment Status is not automatically available to every subcontractor.
HMRC applies several conditions. These include your tax compliance history, the nature of your business, how it is operated and its turnover.
Current HMRC guidance states that the turnover test, excluding VAT and the cost of materials, generally requires at least:
£30,000 for a sole trader
£30,000 for each partner, or at least £100,000 for the whole partnership
£30,000 for each company director, or at least £100,000 for the whole company
Additional rules can apply depending on the structure of the business.
If you are considering Gross Payment Status, it is worth checking your individual circumstances rather than assuming you qualify based on turnover alone.
CIS deductions do not remove the need to deal with your wider tax responsibilities.
For a sole trader or partner, your Self Assessment tax return should include your income before CIS deductions and the CIS deductions that have already been taken. HMRC uses this information when calculating your final position.
This is why accurate payment and deduction statements are so important.
Missing records or discrepancies between the figures you report and information held by HMRC can make the process more complicated.
A few simple problems can make CIS more difficult than it needs to be.
Not registering can result in deductions being made at 30% rather than the standard 20% rate for registered and verified subcontractors.
These statements provide important evidence of the CIS deductions contractors have taken from your payments.
CIS deductions are advance payments towards tax and National Insurance. Your eventual tax position depends on your wider circumstances.
For tax reporting, sole traders and partners should report the total payment before CIS deductions as income and separately record the CIS deductions taken.
Keeping your bookkeeping and CIS records organised throughout the year makes it much easier to check deductions and prepare the figures needed for your tax return.
Yes. Working with an accountant who understands CIS can help make the accounting side of construction work considerably easier to manage.
At Findlay Todd, we can support contractors and subcontractors with CIS accounting alongside bookkeeping, tax returns and wider accountancy requirements.
Keeping everything connected means your income, expenses and CIS deductions can be properly recorded throughout the year, rather than trying to piece everything together when a deadline arrives.
Whether you are registering for CIS, keeping track of deductions, preparing your tax return or trying to understand your position, contact Findlay Todd Accountants. Our team can provide straightforward accounting support.