The Construction Industry Scheme (CIS) is HMRC’s system for handling tax on payments from contractors to subcontractors in construction. Under it, a contractor deducts money from a subcontractor’s payment and passes it to HMRC as an advance towards the subcontractor’s tax and National Insurance. The rate is 20% for registered subcontractors, 30% for those not registered, and 0% for subcontractors with gross payment status.
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CIS affects most businesses in construction, as contractor, subcontractor, or often both. Getting the registration and the deductions right matters, because the rate applied, and the records kept, feed straight into the subcontractor’s tax position.
How does the Construction Industry Scheme work?
A contractor registers for CIS and, before paying a subcontractor, verifies them with HMRC to find the correct deduction rate. The contractor then deducts that percentage from the labour part of the payment, after taking off the cost of genuine materials, and pays it to HMRC. The subcontractor receives a payment and deduction statement, and sets the deductions against their own tax bill.
What are the CIS deduction rates?
There are three. Subcontractors registered under CIS have 20% deducted. Subcontractors who are not registered have 30% deducted, deliberately higher to encourage registration, which is free. Subcontractors with gross payment status have nothing deducted and are paid in full, settling their tax through their return instead.
What is gross payment status?
Gross payment status lets a subcontractor be paid without any CIS deduction. To qualify, HMRC applies tests including a minimum level of construction turnover, a history of filing and paying tax on time, and operating through a UK bank account. It helps cash flow, but it comes with the responsibility of getting the year-end tax right, since nothing has been taken at source.
Who counts as a contractor or subcontractor?
A contractor is a business that pays others for construction work; a subcontractor is one that does the work for a contractor. Many businesses are both. Some businesses outside construction that spend heavily on construction can also be treated as deemed contractors and fall within CIS, which catches people out.
Where tax investigation cover fits
CIS is an area HMRC checks closely, and a compliance check into deductions or status can be time-consuming to deal with. Tax investigation insurance covers the professional fees. See our guide to employer compliance checks, or if you are an accountant, our accountants’ scheme.
Related guides: tax investigation insurance for CIS subcontractors, tax investigation insurance for sole traders, tax investigation insurance for construction contractors.
Solar Protect tax investigation insurance pays up to £100,000 of accountant’s fees with no excess. Read how our cover works or get a quote today.
See also: Building contractors insurance: what cover you need.