What is CIS, and how are deductions made? CIS (Construction Industry Scheme) is operated by HMRC, designed specifically for the construction sector. Understanding CIS and how it works is important, especially as a contractor or subcontractor working within the industry. For CIS deductions explained clearly, continue reading.
What is CIS?
CIS, standing for the Construction Industry Scheme, is a UK government scheme for individuals working in construction. The scheme was introduced in the 1970s, applying to contractors and subcontractors to simplify paying tax and National Insurance.
CIS was also implemented to prevent tax evasion and protect workers in the industry. Failure to comply with CIS will likely lead to many negative consequences, such as penalties, fines, and a poor reputation.
Who Should Register for CIS?
Contractors must register for CIS. You’re considered a contractor under CIS if you:
- Hire subcontractors
- Spend over £3 million a year on construction
While contractors must register for CIS before working with their first ever subcontractor, subcontractors do not. However, it can be beneficial for subcontractors to register for CIS too if they want to pay less to HMRC per month.
To be specific, subcontractors who register for CIS will pay a lower deduction rate of 20% rather than the 30% applied to those who are unregistered.
What are CIS Tax Deductions?
CIS tax deductions are an amount of tax that contractors withhold from subcontractor payments before issuing them to HMRC. Essentially, these deductions are just a portion of a subcontractor’s payment that legally must be paid directly to HRMC as part of CIS.
All deductions made to HMRC are classed as payments towards both the subcontractor’s tax and National Insurance. CIS deduction rates vary for subcontractors depending on a few factors.
CIS Deduction Rates
| Rate | Applicable to |
|---|---|
| 20% | Subcontractors registered with CIS |
| 30% | Subcontractors not registered with CIS |
| 0% | Subcontractors with a Gross Payment Status |
How to Make CIS Tax Deductions
Making a CIS tax deduction is relatively simple and can be completed by following a few key steps:
- Confirming the whole amount (gross total) of the subcontractor’s invoice
- Subtracting the amount the subcontractor has paid for (including VAT, equipment, fuel, etc)
- Deduct the CIS percentage rate (provided by HMRC or using the table above) from the amount left over
Let’s take a look at an example to make sure you understand:
A subcontractor has been hired. They send you a bill for £1,500 (£1,000 for labour and £500 for materials). Under CIS, only the labour is taxed, not the materials. The subcontractor is registered under CIS, meaning a 20% deduction must be taken from the £1,000 labour cost. 20% of £1,000 is £200 – therefore, HMRC requires £200.
Can You Avoid CIS Deductions?
Yes, you can avoid CIS deductions. If your tax affairs are updated, you can apply for something called Gross Payment Status with HMRC. This allows contractors to pay subcontractors without having to make any deductions. If you’re a subcontractor, this means you’ll be 100% responsible for paying both tax and National Insurance to HMRC yourself.
Claiming CIS Tax Refunds
When too much tax has been deducted from subcontractor payments than what’s owed, a refund will likely be due. There are a few reasons why individuals end up paying too much under CIS.
This could be due to being incorrectly registered with CIS or not accounting for all allowable expenses under the scheme. Either way, if you believe that you’ve overpaid CIS tax, you are fully entitled to a refund:
- Double-check that you’re due a CIS tax refund
- Gather evidence of an overpayment in case required
- File your Self-Assessment tax return if you’re self-employed under CIS
- Submit a tax return online through the HMRC portal
- Wait for HMRC to process your claim and calculate the potential refund amount
Typically, CIS tax refunds are processed quickly in just a few weeks after review. If you need to claim a CIS tax refund differently (not through Self-Assessment), we advise visiting the HMRC website here for more information on CIS tax refunds.
Expert Payroll & CIS Services
At LJS Accounting Services, we offer expert payroll & CIS services. Our team are highly experienced, and we take pride in providing exceptional CIS-related services like no other. Remove the headache and time-consuming worry of working out tax and National Insurance – we can do it for you.
If you employ subcontractors registered under CIS, we can help handle finances to prevent the risk of fines or general issues while complying with HMRC. Our team will handle all relevant paperwork, offering advice and support along the way when needed.
To speak with a member of our team today, please don’t hesitate to get in touch. We look forward to speaking with you soon!
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
