The Ultimate Guide to Construction Industry Scheme (CIS) Tax in the UK
When contractors undertake a large construction project, they usually hire subcontractors to help with the project, rather than hiring staff. Hiring staff will result in the payment of some additional fees to HMRC. The HMRC felt it was too easy for Contractors to get some work done, carry cash, and not file income taxes. Therefore, HMRC introduced the CIS tax to reduce tax evasion. The Construction Industry Scheme is a type of tax in the UK designed to increase the revenue of the construction industry. Contractors must deduct money from payments of the (workers) subcontractors and transfer it to HMRC as a tax.
How the CIS Tax Works
The Construction Industry Scheme was established by the HMRC to collect income tax from people working in the construction industry throughout the year.
Construction companies collect taxes on behalf of their employees (subcontractors) and send the money to HMRC as a tax payment:
● 20% of the employees registered as a subcontractor of HMRC
● 30% for those who don't.
Example of How Construction Industry Scheme (CIS) Works:
We assume that the "ABC" company hires Allan as a subcontractor on its site. Each month, Allan owes £ 1,500 for his work.
● Each month, the company pays HMRC £ 300 (20% of £ 1,500) of Allan's tax.
● The company sends the CIS statement to Allan as proof
● The company will pay Allan the remaining £ 1,200 in payment for his work.
Which Professions and Companies are Included in the CIS?
Construction Industry Scheme includes the following professions:
● Site Preparation
The program supports all companies, associations and freelancers operating in the construction sector. Companies can be viewed as contractors, subcontractors, or both.
How Does CIS Affect Contractors?
To combat tax evasion, contractors are now required to report to HMRC which subcontractors they have used. They must also pay the Construction Industry Scheme (CIS) fee to the HMRC. Instead of waiting for the subcontractor to carry over the corrected tax at the end of the year, the contractor pays the tax upfront to HMRC.
What Happens If You Don't Pay?
As a contractor, you are responsible for deducting the correct amount of taxes from your subcontractors and failure to notify HMRC of your subcontractors' payments can result in a fine of up to £ 3,000.
Returns must be submitted no later than the 19th of each month for the preceding financial month; therefore May declarations must be submitted by 19 June. Late returns will incur a £ 100 penalty for the day lost.
How Much is the CIS Tax
When a contractor pays you under CIS, he will normally make deductions at the standard rate of 20%. Contractors will make deductions at a rate of 30% if you are not registered with the CIS.
How to File a CIS Return Online?
Go to the HM Revenue login website. 'Login' to your accountant by using your username and password.
Go to the "Services you can use" section, and then click "Activate".
In the "CIS" section, click "Access the service".
Click "Add Subcontractor". Select whether the subcontractor is an individual or a company. Click Continue". Enter the subcontractor details, then click "Next".
Click on "Verify Subcontractor". You should see your new subcontractor on the table. Check the box in the Review column and click "Next". The subcontractor should be verified immediately and you should see the verification number.
If you haven't made any payments to the subcontractor this month, click "Nil Return". If you paid the subcontractor this month, click "CIS returns product" (on the right option) or "File Monthly Report" (on the left menu).
Select the month and year for which you are reporting. Click "Next".
Select the subcontractor you paid this month. You must check the box in the Include this month column to select them. Then click Next."
You will now see a table with all the selected subcontractors. You must enter the correct 'Total payment without VAT' and 'Total CIS taxes deducted' amounts for each subcontractor for that month. Then click Next."
If you are not submitting a return, skip steps 8 and 9. Check the boxes next to "I confirm...". Then click "Next."
Enter your email address and you will receive confirmation of the submission of this declaration by email. Click Submit. Enter your credentials to confirm submission. Click “Submit”. Submission is successful. Well done. Click “Next”.
I recommend saving and printing your receipt and monthly statement. To save, click View & Save, to save the receipt and click "Print" to print the statement.
Information Required to Verify a Subcontractor
There are three ways to verify a contractor:
● Use the HMRC CIS online service
● Call the HMRC CIS Helpline - 0300 200 3210
● Use third-party software
Of course, your tax advisor will also be happy to do this for you. If you would like us to help you with the process please call us on 02085718826
You (or your tax advisor) must provide the following information about your company as an entrepreneur:
● the name of your company or organization
● Your Unique Tax Reference (UTR)
● Reference from your billing office
● your job reference
HMRC will check the details provided against their own records and confirm if the subcontractor is registered. They give you a verification reference number and tell you how much tax to deduct when you pay it. The verification number is usually in the format V followed by 10 digits, eg. for example V123456789. If HMRC cannot verify that the subcontractor is registered they will provide another type of reference number. If you verify more than one subcontractor at the same time, HMRC will provide the same verification number. The verification number serves as proof that you are deducting the correct amount of tax.
Based on the response from HMRC, the rate of tax you need to deduct will be:
● 30% if not registered as a subcontractor
● 20% when registering at the normal/net rate
● 0% if registered with gross payment status
Support From Pro Tax Accountant
If you would like to discuss any aspect of the program or need assistance with the auditing process and tax deductions, our team of experienced tax advisors are familiar with CIS and will be happy to assist you. To find out more contact us on 02085718826 or send us a free quote.