If you’re feeling confused by the Construction Industry Scheme (CIS) rules and regulations, don’t worry, you aren’t alone! CIS rules deal with how contractors working in the construction industry pay their sub-contractors, so it can have a big impact on your reporting responsibilities, and even on your take home pay.
If you do fall under CIS and don’t comply with the system, you could find yourself facing crippling financial repercussions. HMRC can request your CIS records at any time and if you aren’t able to produce them, they can fine you up to £3,000, as well as further late filing fees—even if it’s just an honest mistake.
The Construction Industry Scheme in a nutshell
The Construction Industry Scheme was introduced in 1971 to simplify and standardise how contractors pay sub-contractors working in the construction industry. The scheme was also designed to streamline how tax is paid and how deductions are made.
Basically, CIS was put in place to address false employment and tax evasion within the construction industry.
Contractors and CIS tax deductions
Under CIS rules contractors are required to make deductions before paying a sub-contractors’ invoice. These deductions go straight to HMRC and are put towards the sub-contractor’s tax and National Insurance (NI) bill as a sort of advance payment on their Self Assessment bill. It basically means that their earnings are taxed at source.
Does a freelancer have to register for CIS?
Not all freelancers will need to register for the Construction Industry Scheme. If you provide services such as copywriting, graphic design, or bookkeeping, for example, you won’t need to worry about CIS at all. As the name suggests, CIS is only relevant to those working within the construction industry.
Am I a contractor or sub-contractor?
If you hire another self-employed person to work with you on a project, and they’re not paid through PAYE as an employee, they’re your subcontractor, and you’re a contractor.
It can get a bit confusing because you might be both a contractor and a subbie at the same time. For example, if you work for someone else as a subcontractor, whilst also contracting work out to a subcontractor of your own!
CIS for contractors – at a glance
As a contractor in the construction industry, you’re legally required to register for CIS whenever you begin paying sub-contractors for work directly related to construction. This doesn’t happen automatically, so it’s up to you to make sure you get yourself set up and sorted.
You’ll need to ask your sub-contractor for their Unique Taxpayer Reference (UTR) and use this to verify that they’re CIS-registered with HMRC. It’s an important step, because their registration status determines which rate you use to make deductions from the bill before paying them.
You must submit CIS Returns to HMRC each month (unless you tell them that you no longer pay any subcontractors) and report the details of any payments and deductions.
CIS for sub-contractors – at a glance
Although a sub-contractor working in the construction industry isn’t required to register for CIS, some people find it has its advantages – namely in terms of cashflow. The rate a contractor uses to work out how much CIS tax to deduct depends on whether or not you’re CIS registered.
- Registered: 20% deductions
- Unregistered: Deductions are made at 30%
When you submit your Self Assessment tax return, you’ll get back any overpaid tax in the form of a tax rebate.
You’ll be issued a statement or payslip detailing the gross payment and total deduction amount each time the contractor files a CIS return with HMRC. Keep these safe for your financial records.
Exclusions from CIS
There are a few exceptions to the rule where both contractors and sub-contractors are concerned, including:
- Architectural surveying
- Carpet fitting
- Delivery of materials
- Site facility management
- Scaffolding hire (without labour)
- Work on construction sites that is clearly separate from construction-related activities, e.g. food catering.
Staying on top of tax as a freelancer under CIS
It’s not unusual to overpay tax under CIS. This is because the deductions don’t take into account your personal allowance or any tax relief that you claim on your allowable expenses.
If you end up overpaying tax under CIS, you’ll be due a refund (or a rebate) from HMRC. One of the best ways to speed up this process and reclaim your money quickly is to get your Self Assessment return filed ASAP!
Looking for more advice on all things finance and accounting as a freelance professional? Head to our Freelancer Finance hub where we have a whole host of handy guides for you to get stuck into.