Construction Industry Scheme: When does it apply?

Definition

The Construction Industry Scheme (CIS) is a tax deduction scheme in the UK that applies specifically to construction work.

What is the Construction Industry Scheme?

The Construction Industry Scheme was established by HM Revenue and Customs (HMRC) to regulate tax payments for subcontractors and contractors working in the construction industry.

Under the CIS, contractors are required to deduct a percentage of the payments they make to subcontractors for construction work. These deductions serve as advance payments towards the subcontractors’ tax contributions and they can offset these deductions against their overall tax liability when filing their annual tax returns.

Both contractors and subcontractors are required to register with HMRC under the CIS. Contractors must register before they can engage subcontractors, while subcontractors must register to ensure they receive the correct tax treatment on their payments.

Contractors are required to submit monthly CIS returns to HMRC, reporting the payments made to subcontractors and the deductions withheld. Subcontractors also have reporting obligations, including filing tax returns and ensuring their CIS records are accurate.

HMRC enforces compliance with the CIS through penalties and sanctions for non-compliance, including late or incorrect filings, failure to verify subcontractors, and other breaches of CIS regulations.

Example of the Construction Industry Scheme

Let’s say Company A is a contractor that specialises in building construction. They hire Company B as a subcontractor to carry out plumbing work on a construction project.

Registration: Company A is registered under the CIS as a contractor, and Company B is registered as a subcontractor.
Payment: Company A pays Company B £1,000 for the plumbing work. However, under the CIS rules, Company A must deduct 20% (£200) from the payment as tax contributions.
CIS return: At the end of the month, Company A submits a CIS return to HMRC.
Tax reporting: Company B receives £800 (£1,000 – £200) for the plumbing work. They can offset the £200 deduction against their overall tax liability when filing their annual tax return.