Construction industry scheme

October 10, 2023

The Construction Industry Scheme (CIS) applies to contractors and subcontractors involved in construction operations.

Even if your business is not normally involved in construction, you may need to register with HM Revenue & Customs (HMRC) if you are spending significant amounts on construction work. Such a business would be termed a “Deemed Contractor”, and the rules pertaining to mainstream contractors would apply.

When registering with HMRC, you need to do so as a contractor (paying for work to be done), as a subcontractor (being paid for construction work you perform), or indeed as both, depending on the nature of your business.

Contractors

These fall into two groups:

Mainstream contractors

A mainstream contractor carries on a business that engages subcontractors for construction operations. The business can be conducted as a sole trade, partnership or limited company.

Deemed contractors

Where the main source of work is in another industry, but where an average of over £1,000,000 per year on average is spent on construction work over three years.

Subcontractors

A subcontractor carries out construction work for a contractor who is also within the construction industry.

Carrying out the work would include performing the work personally, or via your own employees or further subcontractors. Again the business can be a sole trader, partnership, limited company, labour agency, staff bureau or foreign business doing construction work in the UK.

It is possible for a business to be both a contractor and a subcontractor.

Works not included in the scheme

Certain kinds of work, such as professional services provided by businesses such as architects and surveyors are not included in CIS, even though related to a construction project.

Appendix C of HMRC’s Guide to CIS lists operations that are typically included or excluded from the Construction Industry Scheme.

Other situations may be excluded from the scheme.

There are occasional situations when businesses that would normally be classed as mainstream or deemed contractors may not have to apply for CIS ruling. An example of this is when these businesses pay for construction work on a property that is used for the purpose of the business.

Businesses that are not mainstream contractors, but are brought into the scheme because they spend an average of more than £1m on construction operations each year, do not need to apply the scheme to expenditure that relates to property used for the purposes of the business itself; or, if the business is a company:

Other companies within the same group
Any company of which 50% or more of the shares are owned by the company

The types of properties covered by this exemption include:

Offices
Warehouses
Nursing homes
Leased property used by the business’ group, including property leased by one company to another within the same group
Any other facilities used for the business

Other occasions when CIS rules don’t apply are:

A deemed contractor pays a construction contract of less than £1,000 after materials costs. (HMRC must approve this).
A contractor pays a subcontractor less than £1,000, after materials costs, for construction work on the subcontractor’s own property, or agricultural property tenanted by the subcontractor.(HMRC must approve this).
A local education authority maintained school, via the head teacher or governors, pays for construction work on behalf of the local education authority.
A charitable institution (not any trading subsidiary) pays for construction work.
Private householders are never treated as CIS contractors, irrespective of the amount they spend on construction work. However, should the builder further subcontract any of the work, that, and any other stage not directly involving the householder, would be within the scope of CIS.

Contractors

When paying a subcontractor, a contractor must first verify the subcontractor. This is done by contacting HMRC online (mandatory requirement as from April 2017) or by phoning the CIS Helpline (0845 366 7899) with the following information about the subcontractor:

Name, or the name of the business or company
their Unique Taxpayer Reference number (UTR)
The partner’s name if operating as a partnership
National Insurance number if they are a sole trader (unless they have applied for a National Insurance number, but not been allocated one yet)
The partner’s UTR or National Insurance number if they are a partnership (or, if the partner is a company, that company’s UTR or company registration number)
Their company registration number if they’re a company

The contractor must confirm that they have agreed on a contract with the subcontractor, or formally accepted their contract tender.

HMRC will:

Check these details against their records.
Confirm whether the subcontractor is registered.
Advise you how to pay the subcontractor.
Give you a verification reference number.

The guidance on payment will be that:

The subcontractor may be paid Gross; or
The subcontractor may be paid net of 20% tax; or
The subcontractor may be paid net of 30% tax (where they are not registered by HMRC).

The tax deduction is calculated on:

These details must be summarised and submitted on monthly returns, which will show preprinted details for subcontractors appearing on previous returns.

The returns refer to payments made in a tax month from the 6th day to the 5th of the following month.

The returns must be submitted to HMRC online or by post within 14 days of the end of the appropriate tax month (i.e. by the 19th of the following month), and any payments of tax deducted made to HMRC by the 22nd of that following month, if paying electronically, or by the 19th, if paying by cheque. returns must be made monthly.

If the contractor will not be making payments to subcontractors, it is advisable to make HMRC aware of the situation.

If a monthly return is submitted late, penalties will be charged from the day after the filing date: a fixed penalty of £100.

If outstanding:

Two months after the filing date: a second fixed penalty of £200.
Six months after the filing date: a tax geared penalty which is the greater of £300 or 5% of any deductions shown on the return.
Twelve months after the filing date: a second tax geared penalty which is the greater of £300 or 5% of any deductions shown on the return.

Where HMRC believes information has been deliberately withheld, that penalty may be increased.

Contractors must:

Keep records for at least three years after the end of the tax year to which they relate.
Make records available to HMRC on request.
Provide viewing facilities for the records if stored electronically.
Provide full scale copies of the records if required.

If a contractor fails to produce records relating to payments made under the scheme, they face a penalty of up to £3,000.

Likewise penalties of up to £3,000 may apply if the contractor:

Fails to give statements to subcontractors registered for payment under deduction, recording their payments and deductions; or
Negligently or deliberately provides incorrect information in such statements.

The contractor must provide each subcontractor with a written statement of deductions made within 14 days of the end of each tax month (i.e. by the 19th of the following month).

If the subcontractor agrees, they may be given electronic statements, as long as the subcontractor can store and print them.

Each statement must include:

The name of contractor the employer tax reference
Either the date when the tax month in which you made the payment ended, or the date of payment, if more frequent statements are issued
The subcontractor’s name and UTR
The subcontractor’s verification reference number if the deduction was at the higher (30%) rate
The gross amount less VAT, CITB levy, materials costs etc
The cost of any materials
The amount of tax deducted

Subcontractors

Subcontractors within CIS must register with HMRC. They may do so and be authorised to receive payments gross, or net of 20% tax.

When a contractor contacts HMRC to verify a subcontractor, they will be instructed on the amount of tax to be deducted from payments to the subcontractor.

If the subcontractor is not known to HMRC, a 30% tax deduction will be made.

If receiving payments net of tax, the deductions suffered are treated as a credit available against the tax and Class 4 National Insurance Contributions calculated when a Self-Assessment Tax Return for the year has been submitted.

If the subcontractor is a limited company, any deductions suffered under CIS for a particular month may be offset against any PAYE deductions from employees due that month. If, at the end of the tax year, there is still a balance of CIS tax in favour of the subcontractor, that will be repaid to them.

In certain circumstances, a subcontractor business may be allowed to receive CIS-related payments gross.

The business must:

Do construction work in the UK and be run largely through a bank account.
Have a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and most companies).
Have complied with all its tax obligations.

The tests that HMRC requires in order to obtain gross payment status are:

The Business Test

Demonstrating that the business:

Carries out construction work, or provides labour for construction work, in the UK.
Is run largely through a bank account.

The Turnover Test

Looking at the business turnover from construction work for the 12 months before the application for gross payment status. Ignoring VAT and the cost of materials, the construction turnover must be at least:

£30,000 for a sole-trader.
£30,000 for each partner in a partnership, or at least £100,000 for the whole partnership.
£30,000 for each director of a company, or at least £100,000 for the whole company.
If five or fewer people control the company, it must have an annual construction turnover of at least £30,000 for each of these individuals.

The Compliance Test

The directors or partners in the business, or beneficial shareholders (where the company is controlled by five or fewer persons), must have submitted all tax returns and paid all tax due on time in the 12 months before the application for gross payment. If HMRC has asked for any information about your tax affairs in that period, it will have had to be provided to them.

In the 12 months prior to the application, some lapses or compliance failures may be ignored.

HMRC will ignore any, or all, of the following failures:

Three late submissions of the CIS contractor monthly return, including ‘nil’ returns – up to 28 days late.
Three late payments of CIS/PAYE deductions – up to 14 days late.
One late payment of Self-Assessment tax – up to 28 days late.
Any employer’s end of year return made late.
Any late payment of Corporation Tax – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
Any Self-Assessment return made late.
Any payment not made by the due date, where it is less than £100.

As from April 2016, the director’s individual Self-Assessment obligations no longer form part of the initial or annual compliance tests which are considered when establishing whether or not a company qualifies for gross payment status.

After gross payment status is granted

If gross payment status is granted, the business will be under constant review and will be subject to the Tax Treatment Qualification Test (TTQT), generally on a 12 month cycle.

HMRC will check whether the sole trader, partners (if trading via a partnership) have, or the limited Company has, complied with their obligations as a taxpayer or employer/contractor in the 12 months leading up to the review.

During that period, the sole trader, the company and any partners must have done all the following:

Completed and returned all required tax returns (but note April 2016 changes as above regarding directors).
Supplied any information to do with tax that HMRC may have requested.
Paid by the due dates:
- All tax due from the business owners or the business.
- All personal National Insurance contributions.
- All PAYE tax and NIC due as an employer.
- Any deductions due from the business as a contractor in the construction industry.

When considering whether the business’ compliance history is satisfactory during the 12-month period of the review, HMRC will ignore any, or all, of the following failures:

Three late submissions of the contractor monthly return, including ‘nil’ returns – up to 28 days late.
Three late payments of CIS/PAYE deductions – up to 14 days late.
One late payment of Self-Assessment tax – up to 28 days late.
Any employer’s end of year return made late.
Any late payments of Corporation Tax – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
Any Self-Assessment return made late.
Any payment not made by the due date, where it is less than £100.

Any of the following will result in failure of the Compliance Test, and gross payment status will be withdrawn on 90 days’ notice, unless HMRC accepts any appeal or explanation given:

The contractor monthly return (including a nil return) late on four or more occasions.
One of the contractor monthly returns is more than 28 days late.
CIS/PAYE deductions are late on four or more occasions.
One payment of PAYE/CIS deductions is more than 14 days late.
One payment of Self-Assessment tax is more than 28 days late.
One payment of Corporation Tax is more than 28 days late.

Or, at the date of the review, you have still outstanding an overdue:

Employer’s end of year return (form P35).
Self-Assessment return (Income or Corporation Tax).
Payment of £100 or more.

Reapplying for gross payment status

If, following a review of the business’ compliance history, HMRC cancels the gross payment status, the business cannot reapply until one year from the date that the cancellation of the gross payment status takes effect.

If an appeal had been lodged against the original decision and the appeal was eventually decided against the business, it will not be possible to reapply until one year after the date the gross payment status was cancelled, following the conclusion of the appeal.

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