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If you work as a contractor or subcontractor in the construction industry, you’ll need to be aware of something called the Construction Industry Scheme (CIS). The scheme allows for tax on a subcontractor’s pay to be deducted at source by a contractor in a supply chain and submitted to HMRC.
These deductions count as advance payments towards the subcontractor’s tax and National Insurance Contributions.
If you’re a CIS subcontractor working through your limited company, any CIS deductions made by a contractor from income due to the company can be offset against the company’s Corporation Tax liability, or refunded directly to the subcontractor by HMRC after the end of the tax year.
The position is the same if you’re a sole trader, but in this situation, any CIS deductions taken from you as a subcontractor are offset against your Personal Tax liability and will be picked up in your annual Self Assessment."
If you’re a contractor, and making deductions from your subcontractors, you must register with HMRC for the scheme. As a subcontractor, you don’t have to register, but deductions may be made from your income at a higher rate if you aren’t registered.
CIS doesn’t apply to payments made to employees, who pay tax using HMRC’s Pay As You Earn (PAYE) system. This article will give you a better idea of what CIS is, and what you need to do to comply.
Who does CIS affect?
CIS covers most construction projects involving:
- A permanent or temporary building or structure
- Civil engineering works like roads and bridges.
- For the purpose of CIS, construction work includes:
- Preparing the site, e.g. laying foundations and providing access works
- Demolition and dismantling
- Building work
- Alterations, repairs and decorating
- Installing systems for heating, lighting, power, water and ventilation
- Cleaning the inside of buildings after construction work.
However, you don’t have to register if you only do certain jobs, including:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in construction including plant and machinery
- Delivering materials
- Work on construction sites that’s clearly not construction, eg running a canteen or site facilities.
Who counts as a contractor or subcontractor?
A contractor is someone who pays subcontractors for construction work. CIS also affects you if your business doesn’t do construction work, but you spend an average of more than £1 million a year on construction work in any three-year period.
If you do construction work for a contractor, you’re a subcontractor. HMRC requires you to register as a contractor or subcontractor and, if you fall under both categories, you need to register under both.
The same CIS rules apply if your business is based outside the UK and you perform construction work as a contractor or subcontractor in the UK
Contractors registered under the Construction Industry Scheme (CIS) are required to deduct the following tax from their payments to subcontractors:
- 20% deduction (if the subcontractor is registered for CIS); or
- 30% deduction (if the subcontractor isn’t registered for CIS).
These deductions are paid by the contractor to HMRC as an advance towards the subcontractor’s tax liabilities.
Alternatively, the subcontractor can apply for gross payment status. This means contractors will pay you (or your limited company) in full, without deductions.
If you’re a CIS subcontractor working through your limited company, any CIS deductions made by a contractor from income due to the company can be offset against the company’s Corporation Tax liability, or refunded directly to the subcontractor by HMRC after the end of the tax year.
The position is the same if you’re a sole trader, but in this situation, any CIS deductions taken from you as a subcontractor are offset against your Personal Tax liability and will be picked up in your annual Self Assessment.
You also need to be aware of the impact of the government’s IR35 legislation (also known as ‘off payroll working’) on your assignment. If you are a contractor or subcontractor and your assignment is affected by IR35, then these rules take precedence over any CIS rules.
How do I register?
To get started, you’ll need:
- Your legal business name - you can also give a trading name if it’s different to your business name
- Your National Insurance Number
- The unique taxpayer reference number (UTR) for your business
- Your VAT registration number (if you’re VAT registered).
If you’re a sole trader and you already have a UTR, you can register for CIS online. You’ll need the Government Gateway user ID and password you used when you registered for Self Assessment (or another government service).
If you don’t have a UTR, visit this page and choose ‘working as a subcontractor’ when prompted to register for Self Assessment and CIS. The CIS helpline can also provide guidance. Limited companies and partnerships have their own specific online forms. HMRC will register the partnership separately to your sole trader registration - they’ll require your partnership UTR and trading name.
What needs to be deducted?
Contractors registered under the Construction Industry Scheme (CIS) are required to deduct the following tax from their payments to subcontractors:
- 20% deduction (if the subcontractor is registered for CIS); or
- 30% deduction (if the subcontractor isn’t registered for CIS).
These deductions are paid by the contractor to HMRC as an advance towards the subcontractor’s tax liabilities. Alternatively, the subcontractor can apply for gross payment status. This means contractors will pay you (or your limited company) in full, without deductions.
If you’re a CIS subcontractor working through your limited company, any CIS deductions made by a contractor from income due to the company can be offset against the company’s Corporation Tax liability, or refunded directly to the subcontractor by HMRC after the end of the tax year.
The position is the same if you’re a sole trader, but in this situation, any CIS deductions taken from you as a subcontractor are offset against your Personal Tax liability and will be picked up in your annual Self Assessment.
The relationships between these transactions are complex, and we’ve broken them down into various situations you may come across.
How is CIS affected by IR35?
IR35 is a tax law introduced to combat tax avoidance by workers supplying their services to clients via an 'intermediary' (such as a limited company) who would otherwise be an employee. It does not usually apply to anyone working as a sole trader business who pays Income Tax and National Insurance through the annual Self Assessment process.
IR35 rules around employment status do, however, apply where the sole trader works on a contract basis for an end-client in a way which could be deemed to an employee / employer relationship based on the day to day working practices. In this situation, the end-client would be regarded as the employer of the worker (sole trader) and liable for any unpaid employment taxes.
As you can see, it's an enormously complex area but Crunch are IR35 experts with over ten years of experience in accounting and tax matters that affect contractors, sole traders and small businesses. We’ve built an IR35 Hub with a wealth of content, guides and videos on the subject. We’ve also developed an IR35 calculator tool for contractors to understand whether they’re affected. It can also help businesses who use contractors themselves, showing them whether they need to treat their contractors as inside IR35 and deduct employment taxes.
Worked example to show how CIS works
The relationships between these transactions are complex, and we’ve broken them down into various situations you may come across.
CIS where your limited company (or you as a sole trader) is the subcontractor only
You work for a contractor who pays you or your limited company (as a CIS subcontractor) and deducts either 20% or 30% for CIS payments. You or your company does not employ any subcontractors as part of this arrangement.
The main contractor must file a monthly report to HMRC showing the deductions made from all its subcontractors, including your limited company (or you if you’re a sole trader).
For limited companies: Your limited company will then include the CIS amount deducted by the contractor through an Employment Payment Summary (EPS). Your company must submit an EPS to HMRC throughout the tax year as part of its PAYE arrangements.
Once the tax year has ended and the Final Payroll Submission (FPS) has been made, your limited company can complete an online form using your government gateway account. HMRC will then use the total amount of CIS deductions made by the contractor(s) you worked for to reduce your company’s Corporation Tax liability. If there’s any CIS credit left over, this will be refunded to your company.
For sole traders: If you’re a sole trader then you should include the CIS amount deducted by the contractor(s) throughout the year on your annual Self Assessment and this will reduce your personal tax bill. Again, if there’s any CIS credit left over, this will be refunded to you.
Your limited company is paying subcontractors
Your limited company is paying subcontractors to do work. None of the work is for another contractor.
Your company must complete a monthly report to HMRC providing certain information, including the amount of CIS deducted from your subcontractors. The report needs to be made for all individuals and businesses you employ as CIS subcontractors.
Your limited company pays all the deductions made over to HMRC in the same way as other PAYE taxes are paid.
You employ subcontractors but you’re a sole trader
You work as a sole trader, but on some or all of your jobs you pay subcontractors to do work. None of the work is for another contractor.
Even though you don’t need to run payroll to pay yourself as a sole trader, if you pay subcontractors you’ll need to run CIS payroll for them and complete a monthly report to HMRC providing certain information, including the amount of CIS deducted from your subcontractors. The report needs to be made for all individuals and businesses you employ as CIS subcontractors.
You will need to pay all the deductions made over to HMRC as other PAYE taxes are paid.
You or your limited company is working for a contractor and is also paying subcontractors
You or your limited company provides services to a contractor, and also uses subcontractors.
In this situation, you’ll need to combine the two previous scenarios:
- The contractor will make the necessary CIS deductions from its payments to your limited company
- Your limited company will make the necessary CIS deductions from the payments it makes to its subcontractors
- The amount your limited company is due from, or is due to pay to HMRC will be the difference between these amounts.
If you’re operating as a sole trader then the situation is the same but as in the previous point you’ll need to make sure you operate CIS payroll for any of your subcontractors.
The position is summarised below.
What about the VAT reverse charge?
The reverse charge is a way of accounting for VAT where the end-customer accounts for VAT and the supplier of construction services doesn’t. The reverse charge means the customer receiving construction services has to pay the VAT to HMRC instead of the
On 1st March 2021, VAT reverse charge rules were introduced. These rules changed the way VAT-registered businesses, also registered under CIS, present their invoices. If you’d like to learn more about the VAT reverse charge and the impact it may have on you, check out the details in our comprehensive “What is VAT reverse charge in the construction sector?” article.
The new rules changed how you account for VAT. The new rules are complex and you may need to change the way you present information on your invoices to your customers and prepare your VAT returns.
How are the rules applied?
The rules apply to standard rate VAT or reduced-rate construction services provided by VAT registered businesses. The reverse charge does not apply to supplies of services which are zero-rated, such as the construction of housing. If you don’t make an onward supply of construction services, you are the end customer and normal VAT rules apply.
If invoices have CIS and non-CIS registered supplies, the reverse charge applies to the whole invoice amount.
A typical situation where the reverse charge applies is where a subcontractor makes a supply of services to a customer (or contractor) who then makes an onward supply of the same construction services to another customer. A typical supply chain is shown below. All parties in the chain are VAT registered. When the customer confirms they are at the end of the supply chain, normal VAT rules apply.
How does this affect me?
That depends on your position in the supply chain highlighted above. You can use the following flowchart to work out if you should apply the reverse charge or whether normal VAT rules apply.
I’m a subcontractor, what do I have to do?
If you’re invoicing a customer (or contractor) in a supply chain, you’ll either have to charge VAT as normal or apply the reverse charge. For the reverse charge, your invoice total will not include VAT. However, your invoice must include a statement advising your customer (or contractor) that the reverse charge rules apply, stating the amount of output VAT to be applied (20% if it’s the standard rate of VAT).
Your customer (or contractor) will need to include that amount on their VAT return. You don’t include anything on your VAT return about the reverse charge. An example invoice and a VAT return are shown below for your business. Your customer (or contractor) will need to include that amount on their VAT return. You do not include anything on your VAT return about the reverse charge.
I’m a main contractor, what do I have to do?
If you’re a main contractor receiving a VAT reverse charge invoice from a subcontractor, you should continue to record it as a normal expense invoice and include input VAT on your VAT return. You’ll also need to account for the reverse charge VAT the subcontractor has notified you about. The overall effect on your VAT liability is neutral as the output VAT is covered by the input VAT.
Other matters
It may be possible to be a subcontractor on one project and a main contractor on another, so you need to consider the VAT status of your services for each construction project you work on.
If you’re currently on the Flat Rate VAT Scheme and the majority of your supplies are affected by the VAT reverse charge, you might want to consider changing to the Standard VAT scheme because:
- The Flat Rate Income amount will be reduced, possibly to nil
- You’ll be losing the opportunity to reclaim input VAT on expenses.
How can Crunch help?
Crunch has a CIS service which has been designed to streamline the whole process for contractors and subcontractors working in the construction industry. Just sign up, send us your information every month and we’ll take care of the rest. Find out more about the Crunch CIS scheme.
