What is CIS Tax and How Much is CIS Tax in the UK?
Updated: May 10
The Construction Industry Scheme (CIS) is a tax that was designed to increase the amount of revenue that is collected from the field of construction. Contractors must take the payment from subbies and transfer it to HMRC for tax purposes. Let's understand in detail.
What's the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax deduction scheme in the United Kingdom, designed for contractors and subcontractors in the construction sector. The primary aim of the scheme is to reduce tax evasion and ensure that subcontractors pay the appropriate amount of tax on their earnings.
Under CIS, contractors are required to deduct money from a subcontractor's payments and pass it to Her Majesty's Revenue and Customs (HMRC). The deductions count as advance payments towards the subcontractor's tax and National Insurance liabilities.
Here are some key features of the CIS:
Contractors are required to register with HMRC for the scheme, while subcontractors can choose to register to benefit from lower deduction rates.
Deductions are made at a fixed percentage rate, depending on the subcontractor's registration status with HMRC. As of September 2021, the rates were:
20% for registered subcontractors
30% for unregistered subcontractors
The scheme applies to payments related to construction work, including labor, materials, and equipment.
Some businesses, such as property developers, may be considered contractors if they engage in construction activities.
There are specific rules and exemptions for deemed contractors, which include businesses that are not primarily in the construction industry but still spend a significant amount on construction operations.
Contractors must file monthly returns with HMRC, providing details of the deductions made from subcontractors' payments. In addition, they must provide a statement to the subcontractor outlining the deductions made. The subcontractor can then use this information to claim the tax deductions when filing their annual Self Assessment tax return.
The CIS is an HMRC scheme that applies when you are employed by contractors working in the field of construction. The CIS regulations mean contractors are generally legally required to withhold tax at 20% if they're "registered" or 30% if they're" not registered. This is distinct from self-employed persons who aren't in the construction industry. They typically receive their earnings net, meaning that no tax is taken out.
The CIS includes more than you typically consider civil and building engineering work. It includes demolition repairs, clearing sites, decorating, as well as the installation of power systems. The HMRC describes the work that is covered in the Construction Industry Scheme.
Be aware that if your company provides construction industry-related services directly to homeowners (so not to contractors) This will not be covered by the CIS and the homeowner would be liable for the cost of your services upon receipt of your invoice.
Note: The tax amount that has to be paid by the contractor varies based on whether you are registered as a subcontractor in the CIS or not.
What's the Purpose of the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) in the UK serves several key purposes, mainly related to tax management within the construction industry:
Tax Compliance: The primary purpose of CIS is to ensure tax compliance in the construction sector, which historically has had issues with tax evasion due to the often transient and temporary nature of work in the industry. By requiring contractors to deduct tax at source, the scheme ensures that subcontractors' income tax liabilities are being met.
Simplification of Tax Process: The CIS helps to simplify the process of collecting income tax within the construction industry. Contractors act on behalf of HMRC by deducting money from subcontractors' pay and directly transferring it to HMRC. This reduces the administrative burden on HMRC and ensures a steady flow of tax revenue.
Enhanced Transparency: The scheme encourages transparency in financial transactions within the construction industry. All payments made under the scheme are documented and reported to HMRC, reducing the likelihood of financial misreporting or fraud.
Fair Competition: By ensuring that all subcontractors are paying the correct amount of tax, the scheme helps to level the playing field and promote fair competition within the construction industry. Without such a scheme, subcontractors who evade tax would effectively be able to undercut their competitors by offering lower prices.
Protection for Subcontractors: While the CIS's primary aim is to ensure that subcontractors pay their fair share of tax, it also provides some protection for subcontractors. For example, if a contractor fails to pay the deductions to HMRC, the subcontractor won't be held liable as long as they can show that the deductions were made from their pay.
Overall, the CIS plays a crucial role in managing tax compliance and promoting fairness and transparency within the UK's construction industry.
Who Needs to Use CIS?
The Construction Industry Scheme (CIS) in the UK applies to businesses and individuals involved in the construction industry who are classified as either contractors or subcontractors.
Here's a breakdown of who needs to use the CIS in the UK:
Contractors: A contractor is any business or other concern that pays subcontractors for construction work. This can include construction companies, building firms, and property developers, as well as government departments, local authorities, and other businesses that engage in construction activities. Even if a business is not primarily involved in the construction industry, it may still be considered a contractor if it spends a significant amount on construction operations.
Subcontractors: A subcontractor is any business or individual that carries out construction work for a contractor. This can include self-employed individuals, partnerships, or companies, as long as they are carrying out construction work. Subcontractors may offer their services directly to contractors or work as subcontractors for other subcontractors.
It's worth noting that not all construction work falls within the scope of the CIS. For example, the scheme does not apply to work carried out by employees, work that is not related to the construction industry, or work that is carried out outside of the UK.
What is the CIS Definition of a Contractor?
In the context of the Construction Industry Scheme (CIS) in the UK, a contractor is defined as a business or other concern that pays subcontractors for construction work.
Contractors can be construction companies and building firms, but they can also be government departments, local authorities, and many other businesses or individuals not primarily involved in construction.
In the CIS, the term "contractor" applies not just to businesses in the mainstream construction industry. There are also "deemed contractors" who, though their main work isn't in the construction industry, can spend a significant amount on construction operations in the course of their business.
A business is considered a deemed contractor if its average annual expenditure on construction operations over a period of three years was £1 million or more.
The responsibilities of a contractor under the CIS include registering for the scheme with HMRC, verifying subcontractors with HMRC, making deductions from subcontractors' payments and paying these to HMRC, and filing monthly returns.
What is the CIS Definition of a Subcontractor?
Under the Construction Industry Scheme (CIS) in the UK, a subcontractor is defined as a business or individual that carries out construction work for a contractor. The type of work can encompass a wide range of activities, such as site preparation, alterations, dismantling, construction, repairs, decorating, and demolition.
Subcontractors can be self-employed individuals, partnerships, or companies. They may offer their services to contractors directly, or they might act as contractors for other subcontractors.
It's important to note that whether someone is considered a subcontractor is not solely about the nature of the work they do but also about the nature of the relationship they have with the entity they're working for. For example, an individual could be considered an employee in one context and a subcontractor in another, depending on the specifics of the contractual relationship.
Subcontractors under the CIS are subject to tax deductions on their invoices, deducted by the contractor and then paid directly to Her Majesty's Revenue and Customs (HMRC). These deductions count as advance payments towards the subcontractor's tax and National Insurance.
Subcontractors can register with the CIS, which has advantages such as being subject to a lower rate of tax deduction. However, even if a subcontractor is not registered, the contractor must still make deductions under the scheme. Unregistered subcontractors face a higher rate of deduction.
An Example of the CIS Tax in the UK
Let's say that a construction company, ABC Builders Ltd, hires a subcontractor, John, to do some electrical work on a construction project. The agreed-upon fee for John's work is £1,000.
Under the CIS, ABC Builders Ltd must make a tax deduction from John's payment before they pay him. If John is a registered subcontractor with HMRC, the deduction rate will be 20%, so the tax deduction from John's payment would be £200.
ABC Builders Ltd would then pay John £800, and they would have to pass the £200 tax deduction directly to HMRC. This £200 deduction would be credited against John's tax liability when he files his annual Self Assessment tax return.
If John is not registered as a subcontractor with HMRC, the deduction rate would be higher at 30%, and the tax deduction from his payment would be £300. In this case, ABC Builders Ltd would pay John £700 and pass the £300 tax deduction directly to HMRC.
It's important to note that contractors must file monthly returns with HMRC, providing details of the deductions made from subcontractors' payments. They must also provide a statement to the subcontractor outlining the deductions made, which the subcontractor can use to claim the tax deductions when filing their annual Self Assessment tax return.
Under CIS, How are Contractors Required to Report to HMRC in the UK?
Contractors under the Construction Industry Scheme (CIS) in the UK are required to report to HM Revenue and Customs (HMRC) on a monthly basis by submitting a CIS monthly return. The return must be filed online and submitted to HMRC by the 19th of each month following the tax month to which the return relates.
Here's an overview of the information that contractors are required to report on the CIS monthly return:
Contractor Information: The contractor's name, unique taxpayer reference (UTR), and the period covered by the return.
Subcontractor Information: The name and UTR of each subcontractor paid during the period, along with the amount paid and the number of deductions made.
Verification Numbers: The verification number for each subcontractor, which is a unique identifier that confirms that the subcontractor is registered with HMRC under the CIS.
Total Deductions Made: The total amount of deductions made from subcontractor payments during the period.
Gross Payment Status: Confirmation of the contractor's gross payment status, if applicable. This status exempts certain subcontractors from having deductions made from their payments.
Declaration: A declaration that the information provided is accurate and complete.
It's important that contractors submit their CIS monthly returns on time, as late filing can result in penalties from HMRC. Contractors must also keep records of payments made to subcontractors, as well as records of any deductions made and remitted to HMRC. These records must be kept for at least three years after the end of the tax year to which they relate.
Under CIS, Which HMRC Forms are Used By the Contractors to Report to HMRC?
Contractors under the Construction Industry Scheme (CIS) in the UK are required to report to HM Revenue and Customs (HMRC) by submitting various forms and returns. Here are the key HMRC forms used by contractors under the CIS:
CIS Registration Form (CIS301): This form is used by contractors to register with HMRC for the CIS. The form requires basic information about the business, such as its name, address, and UTR, as well as details of the individuals responsible for the business.
Verification Request Form (CIS302): This form is used by contractors to request a verification number for a subcontractor who is not yet registered under the CIS. The form requires information about the subcontractor, such as their name and address, and the type of work they will be carrying out.
Monthly Return Form (CIS300): This form is used by contractors to report to HMRC on a monthly basis. The form requires details of all payments made to subcontractors during the period, as well as details of any deductions made. Contractors must file their monthly returns online by the 19th of the month following the end of the tax month to which the return relates.
CIS Exemption Certificate Form (CIS317): This form is used by subcontractors who believe that they are entitled to be paid without deductions under the CIS. Subcontractors can apply for exemption certificates by completing the form and sending it to HMRC for approval. If the application is successful, the subcontractor will be issued with an exemption certificate that they can give to their contractor.
Annual Return Form (CIS308): This form is used by contractors to provide HMRC with an annual summary of their CIS activity. The form requires details of all payments made to subcontractors during the tax year, as well as details of any deductions made. Contractors must file their annual returns online by January 31st following the end of the tax year to which the return relates.
It's important that contractors understand which forms are required under the CIS and file them on time to avoid penalties and interest charges from HMRC.
How Much is CIS Taxes in the UK?
There are currently three kinds of CIS tax rates in place. These CIS tax rates are 30%, 20%, and zero percent.
Recap of CIS Tax Rates
CIS is not an additional tax. All deductions made can be claimed back from HMRC. Most businesses will utilize the deductions made to offset tax obligations at the end of the year. Subcontractors with 20-30 percent receive less money through their agreements. But they will be liable for less tax later on.
Subcontractors that are zero percent receive the entire amount of their contracts today. They do not have any deductions that can offset their tax obligations at the end of the year (or additional taxes). It is important to note that the CIS tax rate doesn't so much affect the total tax due. However, it affects the flow of cash for the company.
CIS Tax Rates with 30 Percent Tax Deduction
Subcontractors are able to choose not to register for CIS. However, businesses that choose to not register are subject to the most significant rate of deduction, which is 30 percent. The majority of subcontractors do not want to and aren't able to pay a CIS tax of 30 percent. So they choose to register for CIS.
Every company that is regularly involved in work that is covered by CIS is required to register as a subcontractor. If you can contact Pro Tax Accountant, we can explain how you can register with the CIS as a subcontractor and what information you will need to register.
Note: When registering as a subcontractor, then the CIS tax rate will be reduced to 20%.
CIS Tax Rates with 20 Percent Tax Deduction
Subcontractors who register with HMRC are subject to tax deductions with the lesser CIS taxes of 20 percent. Subcontractors who pay tax burdens of the 20 percent tax are referred to as net subcontractors.
The majority of smaller subcontractors choose to take the CIS tax of 20 percent. The reason is that the deductions made may be utilized to reduce the tax burdens of their own or their corporate tax obligation. This is a great option for smaller businesses as they are struggling to pay the tax bill at the end of the year.
When a company expands beyond a certain amount the impact on cash flow from the CIS Tax rate of 20 percent is too much. The good news is that businesses can apply to be gross subcontractors. They are liable for 0% CIS tax.
What are CIS Tax Rates With no Tax Deduction?
In the Construction Industry Scheme (CIS) in the UK, contractors are required to make tax deductions from payments made to subcontractors, which count as advance payments towards the subcontractor's tax and National Insurance (NI) liabilities. However, some subcontractors may be eligible for a 0% deduction rate, which means that no tax is deducted from their payments.
To be eligible for a 0% deduction rate, a subcontractor must meet certain criteria and provide the contractor with specific information. Here are some situations where a subcontractor may qualify for a 0% deduction rate:
Gross Payment Status: Subcontractors who meet certain conditions may be eligible for gross payment status. This means that they can receive payments without any deductions being made. To qualify for gross payment status, subcontractors must have a track record of paying their tax and NI on time and have a turnover of at least £30,000 per year.
Exemption Certificates: Subcontractors may also be eligible for a 0% deduction rate if they have an exemption certificate. This can be obtained by completing form CIS317 and sending it to HM Revenue and Customs (HMRC) for approval. Exemption certificates are usually issued to subcontractors who do not expect to earn more than the personal allowance in a tax year.
Non-UK Residents: Subcontractors who are not UK residents may also be eligible for a 0% deduction rate, provided that they meet certain conditions and provide the contractor with specific information.
It's important to note that even if a subcontractor is eligible for a 0% deduction rate, they are still responsible for paying their tax and NI liabilities. They will need to report their income and pay any tax due through Self Assessment.
If a subcontractor does not provide the contractor with the necessary information to qualify for a 0% deduction rate, or if they are not eligible for gross payment status or an exemption certificate, then the contractor must deduct tax from their payments at the appropriate rate (either 20% or 30%).
What is the Difference Between CIS Suffered and Deducted?
CIS (Construction Industry Scheme) suffered and deducted refer to two different concepts related to tax withholding in the construction industry.
CIS suffered refers to the amount of tax that a contractor withholds from a subcontractor's payment and pays directly to HM Revenue & Customs (HMRC) on behalf of the subcontractor. The contractor deducts this tax at a rate of 20% (30% for unregistered subcontractors) from the subcontractor's payment and sends it to HMRC. The subcontractor can then claim credit for this tax deduction against their overall tax liability when they file their tax return.
On the other hand, CIS deducted refers to the amount of tax that a subcontractor has already had deducted from their payments by their contractor. When a subcontractor receives a payment from a contractor, the contractor will deduct 20% (or 30% for unregistered subcontractors) from the payment and send it to HMRC as CIS suffered. The subcontractor will then receive the net payment (i.e. the payment minus the CIS deduction) and can use this to calculate their taxable income for the year.
What is the Process of Paying CIS Tax in the UK?
The process of paying CIS tax in the UK involves several steps, which are designed to ensure compliance with the Construction Industry Scheme (CIS) rules and regulations. Here's an overview of the process:
Verify the Subcontractor: Before making any payment to a subcontractor, the contractor must first verify the subcontractor with HM Revenue and Customs (HMRC). This involves checking that the subcontractor is registered with the CIS and obtaining a verification number from HMRC.
Calculate the Deduction: Once the subcontractor has been verified, the contractor must calculate the tax deduction that needs to be made from the payment. The deduction rate will depend on whether the subcontractor is registered with HMRC under the CIS, and whether they have a 0% deduction rate, a 20% deduction rate, or a 30% deduction rate.
Make the Deduction: The contractor must deduct the appropriate amount of tax from the subcontractor's payment before making the payment. The tax deduction must be remitted to HMRC within 14 days of the end of the tax month in which the payment was made.
Submit the Monthly Return: At the end of each tax month, the contractor must submit a monthly return to HMRC. The return must include details of all payments made to subcontractors during the month, as well as details of any tax deductions made. The return must be submitted online by the 19th of the following month.
Pay the Tax Liability: The contractor must pay any tax liability due to HMRC by the deadline for the return. If the tax liability is not paid on time, the contractor may be subject to penalties and interest charges.
Issue a Statement to the Subcontractor: After making a payment to a subcontractor, the contractor must issue a statement to the subcontractor showing the amount of the payment and the amount of the tax deduction made. The statement must be issued within 14 days of the end of the tax month in which the payment was made.
It's important to note that the CIS tax process can be complex and time-consuming, especially for contractors who are new to the scheme. As such, many contractors choose to work with a professional accountant or tax advisor who can help them navigate the CIS rules and regulations and ensure compliance with the scheme.
What are Penalties for Non-Compliance for Construction Industry Scheme (CIS) Requirements?
If you work in the construction industry in the UK, you are likely familiar with the Construction Industry Scheme (CIS) and its requirements. The CIS is a tax withholding scheme that applies to payments made to subcontractors in the construction industry. Compliance with CIS rules is essential to avoid penalties and fines. In this article, we'll discuss the penalties for non-compliance with CIS requirements in the UK.
Late Filing Penalties
The CIS301 form, which is used to report payments made to subcontractors, must be filed on time to avoid late filing penalties. If the form is not submitted by the due date, which is the 19th of the month following the end of the tax month, you may be subject to a penalty. The amount of the penalty depends on the number of days late and can range from £100 to £1,500.
Penalties In addition to late filing penalties, there are also penalties for late payment of CIS deductions. If you fail to make a CIS deduction payment by the due date, which is the 22nd of the month following the end of the tax month, you may be subject to a penalty. The amount of the penalty depends on the number of days late and can range from 1% to 4% of the outstanding amount.
Incorrect Returns Penalties
If you submit a CIS301 form that contains incorrect information or is incomplete, you may be subject to a penalty. The penalty can range from £100 to £3,000, depending on the severity of the error and the number of errors made. It is important to ensure that all information on the form is accurate and complete to avoid this penalty.
Failure to Verify Subcontractor Status
Contractors are required to verify the status of their subcontractors before making any payments. If a contractor fails to do so, they may be subject to a penalty. The penalty can range from £100 to £3,000, depending on the number of failures to verify. It is important to verify subcontractor status to ensure that all payments are made correctly and in compliance with the CIS rules.
Failure to Deduct and Pay CIS
Contractors are required to deduct and pay CIS from payments made to subcontractors. If a contractor fails to do so, they may be subject to a penalty. The penalty can range from £100 to £3,000, depending on the number of failures to deduct and pay. It is important to ensure that all CIS deductions are made and paid on time to avoid this penalty.
Persistent Non-Compliance Penalties
If a contractor or subcontractor persistently fails to comply with CIS requirements, they may be subject to a persistent non-compliance penalty. The penalty can range from 5% to 20% of the deductions that should have been made, depending on the severity and duration of the non-compliance.
Thus non-compliance with CIS requirements in the UK can result in significant penalties and fines. These penalties can include late filing penalties, late payment penalties, incorrect returns penalties, failure to verify subcontractor status penalties, failure to deduct and pay CIS penalties, and persistent non-compliance penalties. It is important to comply with CIS rules and regulations to avoid these penalties and ensure that all payments are made correctly. If you have any questions or concerns about CIS compliance, consider seeking professional help to ensure that you are meeting all requirements and avoiding any penalties.
Why is it a Good Idea to Get Professional Help for CIS in the UK?
If you're a contractor or subcontractor in the UK's construction industry, then you may already be familiar with the Construction Industry Scheme (CIS). This scheme is designed to ensure tax compliance within the construction industry and can be a complex and time-consuming process. That's why many contractors and subcontractors choose to get professional help with the CIS.
Here are some reasons why it's a good idea to get professional help for CIS in the UK:
Avoiding Penalties and Fines
One of the most significant benefits of getting professional help for the CIS is avoiding penalties and fines. The CIS is a highly regulated scheme, and failure to comply with its rules and regulations can result in hefty fines and penalties from HM Revenue and Customs (HMRC).
By working with a professional who has extensive knowledge and experience with the CIS, you can ensure that you are complying with all the rules and regulations of the scheme. This can help you avoid costly penalties and fines, which can save you both time and money in the long run.
Saving Time and Energy
Complying with the CIS can be a time-consuming and complex process, requiring you to keep accurate records, file monthly returns, verify subcontractors, and make tax deductions. This can be a drain on your time and energy, especially if you're not familiar with the scheme.
By working with a professional who specializes in CIS compliance, you can save time and energy. They can take care of all the paperwork and administration involved in the scheme, leaving you free to focus on your core business activities.
Maximizing Tax Efficiency
Working with a professional who is familiar with the CIS can also help you maximize your tax efficiency. They can help you understand the deductions that can be made under the scheme and ensure that you're paying the correct amount of tax.
In addition, they can help you identify opportunities for tax planning and optimization, such as using the flat rate VAT scheme or incorporating your business. This can help you save money on your tax bill and maximize your profitability.
Compliance with the CIS is essential for contractors and subcontractors in the construction industry. It's important to ensure that you're following all the rules and regulations of the scheme, as failure to do so can result in significant penalties and fines.
Working with a professional who specializes in CIS compliance can ensure that you're following all the rules and regulations of the scheme. They can help you keep accurate records, file monthly returns on time, verify subcontractors, and make tax deductions correctly.
Getting Expert Advice and Support
Finally, working with a professional who specializes in the CIS can give you access to expert advice and support. They can help you navigate the complexities of the scheme and provide you with guidance on how to comply with its rules and regulations.
In addition, they can provide you with ongoing support and advice, helping you stay up-to-date with any changes to the scheme and ensuring that you're always in compliance.
Overall, getting professional help with the CIS in the UK can be a smart move for contractors and subcontractors in the construction industry. It can help you avoid penalties and fines, save time and energy, maximize tax efficiency, ensure compliance, and get expert advice and support.
Whether you're a contractor or subcontractor, it's important to work with a professional who has extensive knowledge and experience with the CIS. They can provide you with the guidance and support you need to comply with the scheme and maximize your profitability. So, consider reaching out to a professional today to see how they can help you with the CIS.