The Construction Industry Scheme (CIS), explained for contractors

What CIS is

The Construction Industry Scheme sets out how contractors in the UK pay subcontractors for construction work. Instead of the subcontractor paying all their tax later, the contractor deducts money from each payment and passes it to HMRC as an advance towards the subcontractor’s tax and National Insurance.

CIS covers most construction work on buildings and civil engineering, including site preparation, alterations, repairs, decorating and demolition. Some work is outside the scheme, such as architecture and surveying, carpet fitting and the delivery of materials.

Who counts as a contractor

You are a mainstream contractor if your business pays subcontractors for construction work. Businesses outside construction can also become deemed contractors if they spend more than a set amount on construction work over a rolling 12 months.

Contractors must register with HMRC before paying their first subcontractor. A business can be both a contractor and a subcontractor.

Verifying subcontractors

Before you pay a new subcontractor, you verify them with HMRC using their name, Unique Taxpayer Reference (UTR) and, for companies, their company number. HMRC confirms whether they are registered and tells you which deduction rate to use.

You do not need to verify a subcontractor again if you have included them on a CIS return in the current tax year or the two previous tax years.

The deduction rates

HMRC tells you the rate when you verify. There are three:

• 20% for subcontractors registered for CIS.
• 30% for subcontractors who are not registered, or who cannot be verified.
• 0% for subcontractors with gross payment status, who are paid in full.

What the deduction applies to

The deduction is taken from the labour part of the payment only. You do not deduct from the cost of materials the subcontractor bought for the job, from equipment or plant hire, or from VAT. This is why invoices should show labour and materials separately.

Monthly returns, payments and statements

CIS runs on tax months, from the 6th of one month to the 5th of the next. For each tax month you must:

• File a monthly return (the CIS300) by the 19th, listing payments and deductions for every subcontractor you paid.
• Pay the deductions to HMRC, usually with your PAYE payment, by the 22nd if paying electronically.
• Give each subcontractor a payment and deduction statement within 14 days of the end of the tax month.

Common mistakes

Most CIS problems come from a few avoidable errors:

• Paying before verifying, and so using the wrong rate.
• Deducting from materials or VAT.
• Combining several contractor schemes on one return. Each scheme files its own.
• Late returns, which attract automatic penalties even when nothing is owed.
• Treating workers who are really employees as self-employed subcontractors.

How Orca handles CIS

Orca verifies subcontractors with HMRC, applies the rate HMRC returns to the labour element of each payment, keeps each contractor scheme separate and produces payment and deduction statements. Because payments come from approved timesheets, the figures on the return match the work that was actually done.