If you are a self-employed construction worker based in the UK, you’ll have no doubt heard of the Construction Industry Scheme, or CIS. But you may not know why CIS exists and why it’s a good idea to be enrolled in it. It can be a bit of a minefield (like a lot of what goes on in HMRC), and anything with the word ‘scheme’ in its name can sound kind of dodgy, can’t it?
But CIS isn’t like that. Once you understand how CIS works, you might be able to benefit from it in a big way.
With this in mind, let’s look at what CIS is, who it applies to, and how it works.
What is CIS?
The Construction Industry Scheme, or CIS, is a UK tax deduction scheme that was brought into tax law in 1971. It was designed to stop tax evasion among self-employed construction workers, which had been a serious problem until then.
The basic idea of CIS is, rather than construction subcontractors paying all their tax and National Insurance (NI) for the year in one lump sum, their contractors take 20% of their gross pay from each payslip and HMRC keeps hold of it for their tax contributions. This system means subcontractors are a) paying their taxes, and b) spreading their tax payments throughout the year (which can make it easier for subcontractors to manage their finances).
The main big plus of CIS is the reduction in tax rates it brings. Construction subcontractors not enrolled in CIS have to give 30% of their taxable earnings to the taxman, while CIS-enrolled subcontractors only pay 20%. As you might imagine, that 10% difference can amount to a lot of money being saved each year.
Who is affected by CIS?
CIS affects contractors and subcontractors who work in construction. In this case, ‘construction’ refers to the following types of work:
- Building temporary or permanent buildings (houses, schools, etc.)
- Civil engineering work (building roads, bridges, etc.)
- Demolition and dismantling
- Other building work
- Site preparation (laying foundations, creating routes of access, etc.)
- Alterations and repairs
- Installing systems for heat, electricity, power, water and lighting
- Post-construction inner building clean-up
There are other types of work within construction that CIS does not apply to, including:
- Planning jobs (surveying, architecture)
- Scaffolding hire
- Manufacturing materials used in construction (raw materials, machinery, etc.)
- Delivering materials
- Carpet fitting
- Non-construction work on construction sites (running the canteen, managing site facilities, etc.)
The difference between contractors and subcontractors, as far as CIS is concerned, is:
- A contractor is either somebody who hires subcontractors for construction work, or a business owner who might not work in construction, but who spends more than £1 million/year on construction work over a three-year period.
- A subcontractor is somebody who is paid to do construction work by a contractor.
All contractors need to register for CIS. Subcontractors do not have to register, but most people who work in finance say it’s a good idea because it means you pay less tax.
At the end of the tax year, all construction industry contractors and subcontractors, regardless of whether they’re enrolled in CIS or not, need to file a self-assessment tax return (SATR). The good news there is, subcontractors enrolled in CIS will often be able to claim a tax refund, like in the example below.
CIS in action
Let’s say a self-employed subcontractor named Stanley works for a contractor named Crystal.
Over the course of one tax year, Stanley invoiced (i.e. asked to be paid for) £20,000 in labour costs and £3,000 in materials. Crystal paid Stanley for his work in monthly instalments, always taking 20% (£20,000 x 20% = £4000) for CIS tax deductions. The cost of the materials Stanley bought were paid back to him in full.
When Stanley files his self-assessment tax return, it will look something like this:
| Turnover | £20,000 |
| Total allowable expenses | £3,000 |
| Net profit | £17,000 |
| Deductions from contractors for tax purposes | £4,000 |
Stanley’s tax owed for the 2023/2024 tax year will then be worked out like this:
| Profit from self-employment | £17,000 |
| Minus personal allowance | -£12,570 |
| Taxable income | =£4,430 |
| Income tax at 20% | £886 |
| National Insurance contributions: | |
| – Class 2 (£3.45 x 52 weeks) | £179.40 |
| – Class 4 (£4,430 x 9%) | £398.70 |
| Total tax and NIC due | =£1,464.10 |
| Minus income deducted through CIS | -£4,000 |
| Total tax owed | =-£2,535.90 |
| Total tax overpaid | £2,535.90 |
In other words, Stanley is due a refund of £2535.90 from HMRC, because he paid too much for tax and NI from his CIS contributions. These refunds happen pretty often, because CIS deductions are based on sales income and don’t consider exceptions like personal allowances or business expenses.
This also demonstrates why CIS workers need to file their tax returns. It’s not enough to assume that taxes are being taken care of by the contractors. If you are registered for CIS and having money taken from your payslip for tax purposes, sending in a tax return is how you set the record straight with HMRC and make sure you’re only paying what you owe.
Is it worth being on CIS?
We certainly think so! Don’t get us wrong – if you’re a subcontractor, you don’t have to be CIS-registered if you don’t want. But we at Baa Accounting say it’s well worth registering with CIS, for a couple of reasons. First, obviously, it means you pay less tax. When given the option to have either 20% or 30% of your taxable income taken by the tax man, it’s a no-brainer, really, isn’t it?
As well as this, being CIS-registered gives you an extra layer of security with invoice payments. Working away from CIS can make it tricky to get some end clients to pay the invoices you send them. But being CIS-registered brings HMRC backing into the picture, which better guarantees that you will always get paid for the work that you do. It also means dodgy contractors (who do exist, as we all know) will be less able to avoid paying you for your work.
Finally, being CIS-registered means that you don’t have to worry about setting aside some of your earnings for the tax man each time you’re paid. Your contractor will do that for you. That means you can rest assured that your tax obligations are being looked after, and you won’t be stuck with a massive tax bill every year.
What about that Self-Assessment Tax Return?
Being CIS-registered does not get you out of filling out a self-assessment tax return each year. Which, we know, is a pain. But it needs to be done, and when you are CIS-registered, you could stand to get a nice healthy tax rebate after your tax return is filed. So, it’s well worth getting done for that reason alone.
Do you need help with your CIS tax return? You’ve come to the right place! We’ve been filing tax returns for CIS-registered contractors and subcontractors for over fifteen years, so it’s safe to say we know what we’re doing. Why not get in touch with us now, and we can help you get your CIS tax return needs sorted?
