Understanding how CIS works is key to ensuring compliance and managing cashflow effectively. In this article, we’ll break down the essentials of CIS, covering who it applies to, how it operates, and the key responsibilities involved.
It’s important to clarify that when discussing CIS, a company such as Focused who engages a CIS worker under a contract for services is referred to as a “Contractor”, whereas the individual carrying out the construction work on behalf of that company, is referred to as a “Subcontractor”.
CIS applies to two primary groups within the construction industry. It’s important for both Contractors and Subcontractors to know their responsibilities under CIS and how these impact their tax obligations:
Contractors, like Focused, who are businesses or individuals who pay Subcontractors for construction work. This includes companies or individuals who spend more than £3 million annually on construction projects, even if construction isn’t their primary business. See here for further information.
Subcontractors who are businesses or individuals that carry out construction work on behalf of a Contractor. This includes sole traders, partnerships, and limited companies. See here for further information.
Subcontractors have duties under CIS to ensure their tax affairs are in order. If you are Subcontractor you are responsible for:
Registration
You need to register with HMRC as a Subcontractor to avoid higher-rate deductions. Registration can be done online or by phone.
Gross payment status
If you meet the criteria, you can apply for gross payment status, allowing you to receive full payments without deductions. This is particularly beneficial for Subcontractors with significant expenses.
Record-keeping
Under CIS, the Subcontractor should keep track of all income and deductions. This helps with tax returns and ensures you don’t pay more tax than necessary.
Filing tax returns and offsetting CIS deductions
If you’re self-employed, you’ll typically offset CIS deductions against your personal tax liability on your Self Assessment tax return. If you operate through a limited company, you can offset CIS deductions against your PAYE liabilities or corporation tax.
CIS deductions are calculated on the labour portion of a Subcontractor’s invoice, excluding materials, VAT, and specific equipment hire. The current deduction rates are:
For example, if a verified Subcontractor invoices £1,000 for labour and £200 for materials, the deduction applies only to the £1,000 labour charge. The Contractor deducts £200 (20% of £1,000) and pays £800 to the Subcontractor, passing the £200 deduction to HMRC.
Gross payment status allows Subcontractors to receive their payments in full without CIS deductions. To qualify, Subcontractors must meet specific criteria, including:
While gross payment status offers cashflow advantages, it also requires disciplined tax management to ensure you can meet your liabilities at the end of the tax year.
To make managing CIS smoother, consider these practical tips:
According to HMRC data, CIS tax receipts for 2022/23 exceeded £6.3bn, reflecting the scheme’s importance in maintaining tax compliance within the construction industry. With over 1.2 million businesses registered under CIS, the scheme continues to play a crucial role in ensuring fair tax collection.
The industry has also seen increased adoption of digital tools for managing CIS. Accounting software with integrated CIS features is helping Contractors and Subcontractors improve accuracy and save time on compliance tasks.
The construction industry is constantly evolving, and changes to tax rules or digital processes can directly impact CIS. For example, HMRC has been promoting the use of digital tools for tax compliance, and future updates to the Making Tax Digital (MTD) programme may further streamline CIS management.
Another potential development is increased scrutiny of employment status. HMRC’s focus on correctly classifying individuals as employees or Subcontractors could lead to stricter enforcement measures. This makes it vital for Contractors to regularly review their contracts and engagement processes.
