If you work in the construction industry, you’ll have come across the construction industry scheme (CIS) at one point or another.
But because it’s so complex, don’t worry if you don’t quite understand everything about it – that’s why we’ve put this blog together for you.
What is the construction industry scheme?
The CIS is a tax deduction scheme working as HMRC’s solution to the problems cash-in-hand payments in the construction industry causes the UK tax authority.
While cash-in-hand payments are perfectly legal, as long as they are declared in full, the Government is losing an estimated £3.5bn a year due to people flaunting the system.
The CIS applies to payments made by a contractor to a subcontractor, who are required to deduct a percentage of payments, which will then be paid directly to HMRC.
Subcontractors registered on the CIS will only see 20% of their payments withheld for tax purposes, rather than 30% for unregistered subcontractors.
If the subcontractor subcontracts its obligations to another party, it will become the contractor in respect to that third party and will have to apply CIS to payments it makes.
The CIS does not apply to employees, since payments to employees are covered by the PAYE system of deduction of tax at source.
When does the CIS apply?
The CIS regime applies to all payments made under a construction contract, which is a contract relating to a construction operation that is not an employment contract.
For CIS purposes, contractors not only include property developers and builders, but non-construction businesses and public bodies that have spent an average of £1 million or more on construction operations over the last three accounting periods.
For the CIS to apply, payments must be made to a subcontractor, who is a person receiving payments under the construction contract and is obligated to carry out the construction operations.
The CIS regime then applies to all payments under a construction contract.
This is important to not, because it means even if a contract covers matters other than construction work alone, the CIS tax deduction system will apply to all payments under it.
Gross payment status under the CIS
If you have gross payment status as a subcontractor, contractors will pay you in full without deductions.
It doesn’t mean you’re suddenly exempt from tax (unfortunately!), but that you pay all your tax and National Insurance as a lump sum at the end of the tax year.
That could seriously help you get a positive cashflow and cover your day-to-day expenses, while removing all concern around double taxation and lengthy tax rebate processes.
Of course, you will have to properly budget for a larger tax bill than usual, as opposed to the CIS deducting tax on automatically.
To qualify for gross payment status, you’ll need to be in HMRC’s good graces with your taxes and have a turnover of at least £30,000.
If you’re a partnership or a limited company, your turnover must be £30,000 per partner/director or at least £100,000 for the whole partnership/company.
We’re leading advisers for the construction industry. For more information about the CIS, get in touch with us.