If you work in the construction industry, you’ll have heard about the construction industry scheme (CIS). If there’s anything you know about it, it’s probably how complex it is.
But we’re here to say don’t worry if you don’t understand everything – that’s why we’ve put this blog together for you.
What is the CIS?
The CIS is a tax deduction scheme that HMRC uses to solve the problem of cash-in-hand payments in the construction industry and the problems that causes the UK tax authority.
While cash-in-hand payments are perfectly legal (as long as they are declared in full), the Government loses around £3.5 billion a year because of people flouting the system.
The CIS applies to payments made by a contractor to a subcontractor, who are required to deduct a percentage of payments, which are then paid directly to HMRC.
Subcontractors registered on the CIS will only see 20% of their payments withheld for tax purposes, as opposed to the 30% that is withheld from unregistered subcontractors.
If the subcontractor in turn subcontracts their obligations to another party, it will become the contractor for CIS purposes and will have tofollow the scheme for its payments.
Employees don’t need to worry about the CIS, as their payments are covered by the PAYE system, which sees tax automatically deducted at source.
When does the CIS apply?
The CIS regime applies to all payments made under a construction contract relating to an operation that is not an employment contract.
Under CIS rules, contractors not only include property developers and builders, but also non-construction businesses and public bodies that have spent an averge of £1 million or more on construction operations over the last three accounting periods.
Payments must be made to a subcontractor for the CIS to apply. A subcontractor is defined as an individual who receives payments under a construction contract.
As we set out above, the CIS regime then also applies to all payments made by the subcontractor to other subcontractors under the main contract.
That means that even if a contract covers matters other than construction work alone, the CIS tax deduction system will apply too all payments under it.
CIS and gross payment status
If you have gross payment status as a subcontractor, contractors will pay you in full without making any deductions.
While that doesn’t mean you’re suddenly exempt from paying tax altogether, it does mean that you can pay all the tax and National Insurance in one go at the end of the tax year.
This can help you attain a positive cashflow and cover your day-to-day expenses. It also removes concern around double taxation and lengthy tax rebate processes.
Of course, you will have to budget properly, rather than enjoying the benefits of having your tax automatically deducted under the CIS. But if you get it right with proper financial advice, you’ll be able to benefit even more from gross payment status.
To qualify for gross payment status, you’ll need to be in HMRC’s good graces with your taxes and have a turnover of at least £30,000.
If you’re a partnership or limited company, your turnover must be £30,000 per partner/director or at least £100,000 for the whole partnership/company.