Navigating the Construction Industry Scheme (CIS) can be challenging for construction businesses in the UK. Whether you’re a contractor or a subcontractor, understanding the CIS is vital to staying compliant and maximising your cash flow. This article breaks down the top ten things you need to know about the CIS scheme to help you manage your business more effectively.
1. What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a set of rules created by HMRC to ensure that tax is correctly deducted from payments made to subcontractors by contractors. If you’re a contractor, you must register for the scheme and handle these deductions properly.
Subcontractors can also register for CIS to reduce their tax deductions from 30% to 20%. It’s an essential part of working in the construction industry in the UK, and understanding it can save you both time and money.
Why it matters to you
Registering under CIS is a legal requirement for contractors and beneficial for subcontractors. It helps ensure you remain compliant with HMRC rules and avoid unnecessary fines or penalties.
2. Who needs to register under the CIS?
All contractors in the construction industry must register for CIS. This includes any business or self-employed person who pays others for construction work. Subcontractors can register, but it’s optional. However, failing to register means facing a higher deduction rate of 30% instead of the standard 20%.
Whether you’re a sole trader, partnership, or limited company, registration is straightforward. It’s a crucial first step to ensure you’re following the law and protecting your income.
What happens if you don’t register?
If you’re required to register and fail to do so, you could face significant penalties from HMRC. Additionally, subcontractors who do not register will face higher deductions, impacting their cash flow.
3. How to register for the CIS scheme
Contractors must register online with HMRC before they start paying subcontractors. This process involves providing details like your business type, Unique Taxpayer Reference (UTR), and National Insurance number.
Subcontractors can also register online. The process is quick and straightforward, and once registered, you’ll receive a unique CIS number, which you will provide to contractors.
Step-by-step guide to registration
- Visit the HMRC website and find the CIS section.
- Complete the registration form with all required details.
- Wait for confirmation and your unique CIS registration number.
4. Understanding your role: contractor vs. subcontractor
A contractor in the CIS context is anyone who pays subcontractors for construction work. This can include builders, property developers, and even local authorities. On the other hand, a subcontractor is someone who is paid by a contractor to carry out construction work.
It’s important to know your role in each project, as it affects your responsibilities under CIS. Some businesses may be both contractors and subcontractors, depending on the project.
Dual roles: What you need to know
If you operate as both a contractor and a subcontractor, you need to register for CIS under both roles. This ensures that you meet all your obligations and avoid penalties.
5. How deductions are calculated under CIS
Under CIS, contractors must deduct 20% from the payments made to registered subcontractors and 30% for those not registered. This deduction is taken from the labour costs only, not materials or equipment costs.
Understanding how to calculate these deductions accurately is key to staying compliant and avoiding penalties. It’s a good idea to use CIS-compliant accounting software to simplify the process.
Quick calculation example
If a subcontractor’s invoice totals £1,200 (excluding VAT) and £200 is for materials, the deduction would be 20% of £1,000, resulting in a £200 deduction.
Invoice Amount | Materials Cost | Taxable Amount | Deduction Rate | Deduction Total | Payment to Subcontractor |
£1,200 | £200 | £1,000 | 20% | £200 | £1,000 |
6. Filing your monthly CIS returns
Contractors must file monthly CIS returns to HMRC, detailing all payments made to subcontractors and the deductions made. These returns must be submitted by the 19th of each month.
Late or incorrect returns can lead to penalties. Keep thorough records and use a reliable system to manage your submissions and stay on top of deadlines.
Pro tip: Automate your returns
Consider using CIS-compliant accounting software to automate your returns. This reduces errors, saves time, and ensures you never miss a deadline.
7. Verifying your subcontractors
Before making payments, contractors must verify their subcontractors with HMRC to confirm the correct deduction rate. This step is essential to ensure compliance and avoid penalties for incorrect deductions.
Verification is a quick process done online or over the phone. Always make sure to verify new subcontractors and re-verify existing ones if their details change.
How to verify a subcontractor
- Log in to the HMRC online CIS service.
- Enter the subcontractor’s UTR and company details.
- Receive the correct deduction rate from HMRC.
8. Common mistakes to avoid under CIS
There are several common mistakes businesses make under CIS, including not registering correctly, failing to verify subcontractors, or making incorrect deductions. These errors can result in fines or penalties from HMRC.
To avoid these mistakes, always double-check your processes and consider seeking professional advice. Keeping accurate records and using software can also minimise errors.
Checklist to stay compliant
- Register with HMRC as a contractor or subcontractor.
- Verify all subcontractors before making payments.
- Submit accurate monthly returns on time.
9. Claiming back CIS deductions as a subcontractor
If you’re a subcontractor, you can claim back CIS deductions when filing your annual tax return. This is particularly important if you’ve had higher-rate deductions due to not being registered or overpayment.
Keep accurate records of all payments and deductions throughout the year to ensure you reclaim the correct amount. HMRC will adjust your tax bill based on your claims.
How to reclaim your deductions
- File a self-assessment tax return with HMRC.
- Include all CIS deductions made from your payments.
- Receive your refund or tax adjustment after assessment.
10. Get expert support for CIS compliance
Understanding the CIS can be complex, but you don’t have to navigate it alone. At SGL Accountancy, we specialise in helping construction businesses manage their CIS obligations. From registration to monthly returns, our experts ensure you remain compliant and avoid penalties.
Our tailored advice and ongoing support can help you focus on what you do best – building great projects – while we handle the paperwork.
Ready to make CIS compliance easier?
Contact us today to learn how we can help your construction business stay compliant, save money, and grow with confidence. Let’s build a brighter future together!
Navigating the CIS doesn’t have to be overwhelming. With the right knowledge and support, you can ensure compliance and keep your construction business thriving. Use this guide as a starting point, and remember, expert help is always available.
Let’s work together to make CIS compliance straightforward and stress-free. Reach out to us today for professional advice tailored to your needs!