Partner Article

Navigating the Construction Industry Scheme (CIS)

Working for a CIS payroll provider I often get asked by prospective clients who are considering using self-employed construction operatives rather than having their own workforce what is the Construction Industry Scheme (CIS) and how do I make sure I comply with it, so I will lay out some guidelines in the following article.

The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry. The principle function of the CIS legislation is to provide guidance on how tax should be deducted and reported by contractors making payments to sub-contractors.

Now some clients who operate as individuals i.e. non-limited companies, believe that CIS only applies to limited companies and that they can pay and report their taxes like any other self-employed person. This is not the case however as CIS applies to limited companies, self-employed individuals and partnerships; in-fact any entity involved in the construction trade that is not an employee must be registered with CIS.

This can be done through the HMRC website or by phoning the CIS helpline. What’s more any business that spends on average more than £1m a year over a 3 year period on construction related activities would have to register for CIS.

If you are a subcontractor apart from filling out your end of year self-assessment forms then once you are registered for CIS there is nothing else you need to do. For contractors however there are a number of other tasks that are required before they can operate a CIS payroll.

Firstly contractors must verify all operatives with HMRC to check whether or not they are registered for CIS. This process will then give the tax deduction that should be applied to each subcontractor payment. The standard rate of tax is 20% however if the subcontractor isn’t registered for CIS or if there are any outstanding issues for instance lapsed CIS cards then the verification process will return with the higher tax rate of 30%. The Contractor withholds the tax deductions which must be paid to HMRC by the given deadline and the remaining money goes to the subcontractor. The payment to the subcontractor must be accompanied by a payment certificate detailing how much was paid and the amount deducted.

Contractors working through CIS must also make monthly returns to HMRC even when no payments have been made to subcontractors. The monthly return details payments made to contractors over the previous month and must be filed on time, I often hear from new clients of the fines imposed on them for late, incomplete or incorrect returns therefore accurate returns are a necessity.

Operating CIS payroll is a fairly simple procedure however it must be bared in mind that even adhering to the procedures laid out in this article, if HMRC believe your subcontractors should actually be treated as employees you as the contractor could be hit with stifling fines and back taxes. The process of HMRC attempting to reclassify subcontractors as employees is known as an employment status challenge. For more information on employment status challenges and the Construction Industry Scheme our full CIS guide can be found here.

This was posted in Bdaily's Members' News section by Probuild Contract Services .