What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax withholding system operated by HMRC that applies to the construction industry. It requires contractors to deduct tax from payments made to subcontractors. The amount deducted depends on whether the subcontractor is registered for CIS and their status. This scheme applies to all payments for construction services, including labour and materials.
How CIS Deductions Work
- Determine subcontractor status: Establish whether they are registered CIS, unregistered, or have gross payment status.
- Calculate labour cost: Subtract materials supplied by the contractor from the gross payment.
- Apply deduction rate: Multiply the labour amount by the appropriate CIS rate (20%, 30%, or 0%).
- Make net payment: Pay the subcontractor the gross amount minus the CIS deduction.
- Remit to HMRC: Send the deducted amount to HMRC monthly. CIS300 monthly returns and payments are due by the 19th of the following month (22nd if paying electronically).
CIS Deduction Rates Explained
20% Registered CIS
Applies when the subcontractor has a valid CIS registration with HMRC and a valid Unique Taxpayer Reference (UTR). This is the standard rate for registered subcontractors.
30% Unregistered
Applies when the subcontractor is not registered for CIS or does not have valid registration documentation. This is a higher rate to protect HMRC revenue.
0% Gross Payment Status
Applies to subcontractors who have been given Gross Payment Status by HMRC. These are typically larger, more established companies with excellent compliance records. No deduction is required.
Who Needs to Register for CIS?
Contractors
Contractors must register for CIS if they:
- Engage subcontractors in the construction industry
- Operate any size of business
- Must register before paying subcontractors
Subcontractors
Subcontractor registration is optional but recommended to:
- Reduce deduction from 30% to 20%
- Improve business credibility
- Simplify tax reporting
CIS and VAT Reverse Charge
CIS and VAT Reverse Charge are separate rules that both apply to construction services in the UK. Here's how they differ:
| Aspect | CIS | VAT Reverse Charge |
|---|---|---|
| Purpose | Tax withholding on labour | VAT liability transfer |
| Applies to | Construction labour | Qualifying construction supplies |
| Who collects | Contractor withholds | Customer pays direct to HMRC |
| Can coexist | Yes, both rules can apply simultaneously to the same invoice | |