The Construction Industry Scheme (CIS) plays a key role in ensuring proper tax compliance within the construction sector. Under this scheme, contractors deduct a portion of payments made to subcontractors and transfer these deductions to HMRC as advance contributions toward tax and National Insurance. CIS covers a wide range of construction activities in the UK, from building and repairs to demolition, though it is important to verify if specific tasks are included.
The scheme applies to two primary groups: contractors, which include businesses or individuals paying subcontractors and those with over £3 million in annual construction expenditure, and subcontractors, such as sole traders, partnerships, and limited companies working for contractors.
Contractors have several responsibilities under CIS, including registering with HMRC, verifying subcontractors’ tax statuses, making accurate deductions, maintaining comprehensive records, and submitting detailed monthly returns. Non-compliance with these obligations can lead to penalties. Similarly, subcontractors are required to register with HMRC to avoid higher-rate deductions, apply for gross payment status if eligible, and meticulously record income and deductions to offset CIS payments when filing tax returns.
CIS deductions are applicable solely to the labour component of a subcontractor’s invoice, excluding charges for materials, VAT, and certain equipment rentals. The deduction rates are set at 20% for verified subcontractors, 30% for those unverified, and 0% for subcontractors with gross payment status. Additionally, CIS transactions involve a VAT anti-avoidance measure known as Domestic Reverse Charge VAT, which shifts the responsibility for VAT from the seller to the buyer in the supply chain, requiring the buyer to account for both input and output VAT.
With CIS tax receipts exceeding £6.3 billion in 2022/23 and over 1.2 million registered businesses, the scheme is integral to maintaining tax compliance in the construction industry. However, as the sector evolves, so do CIS-related rules and processes. HMRC’s push for digital compliance and its focus on employment status verification highlight the need for contractors and subcontractors to stay updated. Seeking professional guidance can simplify CIS management, ensuring compliance and efficient operations. If you are looking for support with CIS registration and compliance, give us a call on 01223 810100.
