Construction Industry Scheme (CIS) is a crucial part of the United Kingdom (UK)’s tax system. However, with the increasing number of subcontractors operating in the industry, tax evasion has become a growing concern for the UK government.
To combat this rising issue, the HMRC has implemented the Construction Industry Scheme, or the CIS for short. This scheme was introduced with the aim to ensure all the subcontractors in the construction sector pay the taxes that they owe.
But what exactly is the CIS and how does it work with Subcontractor? Read to the end to find out.
You can also check our complete guide to Construction Industry Scheme which explains the tax rules and penalties that apply to both contractors and subcontractors under the CIS.
Who is a Subcontractor?
An individual business, partnership, or company can be a subcontractor if it is hired by the main or general contractor to perform a specific part of a larger construction project.
Subcontractors are typically skilled professionals who specialize in a specific trade, such as electrical, plumbing, roofing, or painting. They are responsible for carrying out a specific scope of work within the project, as defined in the contract between the general contractor and the subcontractor.
They may also hire their own subcontractors to complete certain portions of their scope of work.
Sub-contractor's Obligations under Construction Industry Scheme (CIS)
Under the CIS, you have specific obligations as a contractor that you must fulfil.
These obligations are intended to ensure that the scheme functions properly and that all construction businesses comply with applicable tax laws.
1. Register Business with HMRC
Self-assessment registration is required for any individual or partnership-based self-employed subcontractor. The subcontractor could also be registered as a limited liability company.
If the sub-contractor does not register with HMRC, the CIS deductions will occur above the standard rate.
There are different deduction rates depending on the registration status for the subcontractor:
- Standard rate of 20% for registered subcontractors
- Higher rate of 30% for non-registered subcontractors
2. Apply for Gross Payment Status
Receiving the full payment of invoices is standard practice for businesses in other industries.
However, when it comes to the construction business, receiving full payment without a tax deduction at source is a privilege.
If a subcontractor wants 0% CIS deductions, they must have gross payment status. However, eligibility for gross payment status is determined by the nature of the subcontractor's business. Here, they need to assess whether they meet the criteria for this status.
Registration requirements for Gross Payment Status
As discussed above, if the sub-contractor desire to receive payment with no tax deduction, it must acquire the Gross Payment Status.
To apply for Gross Payment Status, the sub-contractor first must get registered under the Construction Industry Scheme (CIS).
Information required to register Subcontractor for CIS
- Legal & trading business name
- National Insurance Number (NIC)
- Business’ Unique Taxpayer Reference Number (UTR)
- VAT Registration Number (if VAT registered)
I do not have UTR. What do I do?
If you are a self-employed sub-contractor without UTR, you can sign up for Self-assessment and CIS simultaneously.
How? – Select ‘Working as Sub-contractor’ when registering for Self-assessment.
Qualifying Conditions for Gross Payment Status
The sub-contractor should carry out its business assessment to know if it qualifies for being paid at gross under CIS . The qualifying conditions require the sub-contractor to pass below three tests.
Business Tests :
The business must be :
- registered with HMRC
- registered for Construction Industry Scheme (CIS)
- conducted by means of a business bank account
- carrying out construction work or supplying labor in the UK
Turnover Tests :
Over the last 12 months, business turnover net of material cost, and VAT must be no less than:
- Sole trader: £30,000
- Partnership/Company: £30,000 per partner/director or £100,000 for entire business
Compliance Test :
To qualify for gross payment status, most importantly the business must have a good tax compliance record with HMRC.
For that, in the prior 12 months, the business must have:
- Submitted all tax returns on time
- Made all tax & national insurance payments on time
Minor Compliance Breaches
However, HMRC is lenient towards minor infractions of compliance rules. The business can still pass compliance test if there have been slight transgressions over 12-month assessment period.
HMRC will disregard any of following breaches for the purpose of compliance test:
- 3 late submissions of the contractor’s monthly CIS return up to 28 days late
- 3 late payments of PAYE/CIS deductions – up to 14 days late
- Any late payment of corporation tax- up to 28 days late
- Any tax payment not made by due date, if it is less than £100
- One late payment of self-assessment tax return- up to 28 days late
- Any Self-Assessment tax return made late
Change of Subcontractor's payment status
HMRC conducts an annual review of whether the sub-contractor continues to satisfy all requirements for gross payment status.
Upon review, if HMRC determines that the sub-contractor is unable to pass any of the qualifying tests, the subcontractor’s payment status can be changed from gross to payment under deduction.
HMRC offers 90 days period for those sub-contractors to appeal against the change of payment status.
All the contractors who have recently verified or used the sub-contractor in their CIS return within the current and two preceding tax years are informed by HMRC about the subcontractor’s payment status change from gross to net.
3. Keep Records & Comply with Regulations
The sub-contractor should keep records of all the deduction statements received from its contractor.
Subsequently, the subcontractor can claim all their CIS deductions through the self-assessment tax return for a sole trader or partnership, and through a monthly Payroll system for limited companies
The Construction Industry Scheme (CIS) has specific obligations for subcontractors. The obligations include registering with HMRC, applying for Gross Payment Status, and complying with regulations. These obligations must adhere to ensure the subcontractors are paid appropriately, and all tax obligations are met.
However, if you are a contractor, don't miss out on learning about Contractor’s Obligations Under Construction Industry Scheme (CIS) with our elaborate guide on the topic.
Frequently Asked Questions
- A Complete Guide to UK Payroll Taxes and Deductions for Employers - 11 July 2023
- Ensuring Compliance with Payroll Tax Reporting Regulations - 25 May 2023
- UK CIS Refunds: When and How to Claim Back Overpaid Tax - 13 April 2023