Construction Industry Scheme (CIS): A Comprehensive Overview

Key Aspects of Construction Industry Scheme.

The Construction Industry Scheme (CIS) legislation is a UK fiscal regulation applicable to all companies or individuals engaged in construction activities within the United Kingdom. The construction sector remains a significant contributor to the UK economy, employing 7% of the workforce and contributing 6% to the national GDP. Introduced in 1971, CIS aims to combat tax evasion and ensure compliance with tax obligations within this high-turnover sector.

Similar to the PAYE (Pay-as-you-earn) system, the Construction Industry Scheme mandates that contractors ascertain whether they are obligated to withhold taxes on payments made to subcontractors, irrespective of whether they are self-employed individuals or companies. Key aspects include:

• Contractors are responsible for managing and verifying subcontractors with HMRC, ensuring compliance with registration requirements.
• There are three withholding tax rates:

– 30% (Higher Rate) for unregistered subcontractors.

– 20% (Standard Rate) for registered subcontractors.

– 0% (Gross Payment Status) for subcontractors granted exemption.

• Clients must notify HMRC of subcontractors payments and provide them with a monthly statement.
• Contractors must remit the withholding tax deducted from payments as described.

Construction Industry Scheme Registration and verification process.

Companies that fall under both categories must register as both contractors and subcontractors.

Unlike contractors, who are mandated to register under the Construction Industry Scheme if they pay subcontractors for construction work, subcontractors are not required to register but face higher withholding rates (up to 30%) if they choose not to. Contractors not primarily involved in construction should still register under CIS if their spending for construction exceeds £3 million within 12 months of the first payment.

Once HMRC has accepted the contractor’s application, they will provide a reference number, including a PAYE Employer Reference and an Account Office Reference. For subcontractor registration, a Unique Taxpayer Reference (UTR) will be provided as reference number.

Before making any payments to subcontractors, the contractor must follow a subcontractor verification process to ensure the correct deduction rate is applied.

In order to run the verification process, the subcontractor must provide the contractor with:

• Business name.
• UK Taxpayer Reference number (UTR).
• Company Registration Number (CRN) or National Insurance Number (NINO) for individuals.

The process involves three main steps:

• The contractor must provide subcontractor details to HMRC through the online portal.
• HMRC verifies the subcontractor’s registration.
• HMRC confirms the deduction rate that the contractor should apply.

Subcontractors, in turn, require the Verification Number to receive compensation or a refund from HMRC. The Verification Number remains valid indefinitely.

Contractor Responsibilities Under CIS.

Contractors have monthly duties they must fulfil under the CIS. Initially, they are required to submit an online declaration to HMRC indicating the amount paid to subcontractors and the amount withheld at source. Additionally, they must provide each subcontractor with a written statement detailing the gross payment amount, the breakdown of materials and labour costs, and the amount withheld. The CIS reporting period runs from the 6th of one month to the 5th of the next, with declarations due to HMRC by the 19th of the following month. As a result of these obligations, contractors make two separate payments: one to the subcontractor, who uses it to partially settle their invoice, and another payment to HMRC, also due by the 19th of the following month.

Contractors are responsible for determining and applying the correct tax rate and ensuring the accuracy of the deduction amount by verifying:

• The registration status of subcontractors.
• The activities fall under the Construction Industry Scheme scope.

Contractors bear direct responsibility for any unpaid tax liabilities. Failure to comply with Construction Industry Scheme regulations can lead to penalties ranging from £100 for the first day of late submission to 5% of the amount owed for delays of 12 or 6 months.

If a contractor has no payments to subcontractors for a period exceeding 6 months, they may request HMRC to suspend the obligation to submit monthly declarations.

It’s important to highlight that CIS deductions apply exclusively to labour costs and not to materials used.

Furthermore, if a subcontractor is engaged to work for an end client who is not required to register as a contractor, there would be no obligation for tax deduction or CIS registration in the UK for the subcontractor.

Work covered by CIS.

The Construction Industry Scheme (CIS) applies to a wide range of construction activities, including:

• Construction of permanent or temporary buildings or structures.
• Civil engineering projects such as roads and bridges.

Specifically, construction work under CIS includes:

• Site preparation, such as laying foundations and providing access works.
• Demolition and dismantling activities.
• Traditional building tasks.
• Alterations, repairs, and decorative work.
• Installation of systems for heating, lighting, power, water, and ventilation.
• Post-construction cleaning inside buildings.

Certain activities are exempt from CIS registration, including:

• Architecture and surveying services.
• Scaffolding hire without accompanying labour.
• Carpet fitting.
• Manufacturing materials used in construction, including plant and machinery.
• Delivery of construction materials.
• Non-construction work on construction sites, such as operating a canteen or site facilities.

For more comprehensive details on what is covered under CIS, contractors and subcontractors can refer to the CIS guide provided by HMRC CISR14330 – The Scheme: construction operations: index of construction operations – HMRC internal manual – GOV.UK (www.gov.uk).

Gross Status.

When registering for the Construction Industry Scheme, a subcontractor may request gross payment status. This means that contractors will pay in full without deductions. If already registered for the Construction Industry Scheme, a subcontractor can apply for gross status validation at a later stage by submitting documentation via post, including evidence demonstrating financial stability and tax compliance (even if based abroad).

Construction Industry Scheme registration for foreign companies.

For any foreign company intending to operate under the Construction Industry Scheme, it is crucial to register before commencing any work. The registration process can take up to 6 weeks.

To register as a contractor, it is also necessary to complete Section 1 of the CIS registration form. For subcontractor registration, complete Section 2 of the CIS registration form and the CIS305 form (Register your company – GOV.UK).

For both registration requests, the applicant must:

• Provide the original certificate of pending charges issued by the tax authorities of the home country.
• Complete form 64-8 if appointing an agent to act on behalf of the company.

If the company is not registered under gross status and deductions have been applied, it can obtain a refund of the CIS tax deducted at the end of the tax year. This is done by submitting an online form that includes the total amount of deductions for the tax year.

If your business deals in or develops land in the UK, the profits are subject to UK tax. You must inform HMRC and register to pay tax as a company or an individual. To register for Corporation Tax, you need to write to HMRC and provide the following information:

• The address of your company’s registered office
• The date your annual accounts are made up to
• The date you started a business dealing in or developing UK land (your company’s first accounting period will start from this date)
• Your company’s country of tax residence
• Your country of incorporation and date of incorporation

Benefits of Construction Industry Scheme.

The Construction Industry Scheme (CIS) offers several benefits to both contractors and subcontractors involved in construction activities in the UK:

• Reduced Tax Evasion: CIS reduces tax evasion by ensuring subcontractors’ taxes are deducted at source and submitted to HMRC.
• Streamlined Payments: It simplifies payment processes by deducting taxes upfront from subcontractors’ earnings.
• Advance Payments: The deductions made by contractors count as advance payments toward subcontractors’ tax and National Insurance liabilities. This assists subcontractors in managing their cash flow and budgeting for their tax obligations throughout the year.
• Clear Regulations: CIS offers clear rules for contractor registration, ensuring compliance and reducing confusion.
• Online Management: Contractors can manage CIS obligations online, including returns and subcontractor verification.
• International Compliance: It ensures international businesses operating in the UK adhere to tax regulations, promoting operational efficiency.
• Support for Subcontractors: CIS supports subcontractors in meeting tax obligations, and fostering transparency in financial transactions.

Conclusion: Understanding CIS in the UK

In conclusion, the Construction Industry Scheme (CIS) stands as a vital framework in the UK’s construction sector, offering robust measures against tax evasion while facilitating streamlined payments and supporting compliance for contractors and subcontractors alike. With clear guidelines, online management tools, and international compliance standards, CIS ensures fair practices, transparency, and financial stability within the industry, ultimately contributing to its efficiency and integrity.

For more information on our Construction Industry Scheme advisory services, please visit our page Property & Construction – WellTax (well-tax.com).