Construction Industry Scheme: A Practical Guide
The Construction Industry Scheme requires contractors to deduct tax from qualifying payments to subcontractors and report those deductions to HMRC. The deductions are advance payments towards the subcontractor’s eventual tax and National Insurance liability.
Who Must Register?
A business is normally a contractor where it pays subcontractors for construction work. A business outside the construction industry can also become a deemed contractor if its average construction expenditure exceeds the relevant threshold.
Subcontractors can register for CIS so deductions are normally made at 20% rather than the 30% rate for unregistered subcontractors. Those meeting HMRC’s conditions may apply for gross payment status.
Contractor Responsibilities
Before paying a new subcontractor, the contractor should:
- Check employment status
- Verify the subcontractor with HMRC
- Establish the correct deduction rate
- Calculate the amount subject to deduction
- Provide a payment and deduction statement
CIS registration does not make someone self-employed. If the working relationship is employment, PAYE may apply instead.
Calculating the Deduction
The deduction generally applies to labour and certain other amounts, but not VAT or qualifying materials paid for directly by the subcontractor. Plant hire, travel and other charges require careful treatment.
Contractors file a separate CIS monthly return; it is not an RTI payroll submission. The return is normally due by the 19th following the tax month. CIS deductions are generally paid with PAYE by the 22nd when paying electronically.
How Subcontractors Recover CIS
Sole traders normally report CIS deductions on their Self Assessment return. Limited-company subcontractors usually offset deductions suffered against PAYE, National Insurance and CIS liabilities through the employer payment summary process, subject to HMRC’s rules.
Records should reconcile invoices, materials, payments received and deduction statements. Differences are easier to resolve when identified monthly rather than at year end.
Written contracts and clear invoices help establish the work performed and the amount attributable to materials, reducing avoidable disputes over deductions.
Contractors must submit a return even for a month with no subcontractor payments unless HMRC has agreed a period of inactivity. Late returns can generate penalties. Subcontractors should check every deduction statement and query missing or incorrect information promptly.
GMS Accountants supports contractors and subcontractors in Cambridge and Nottingham with registration, verification, monthly returns and tax records. The VAT domestic reverse charge may also apply to construction services. Contact us for CIS support.
