Construction Industry Scheme (CIS) Tax Returns

Key Responsibilities of Contractors

• Registering for CIS: Contractors must register with HMRC under the CIS to deduct tax from subcontractors’ payments.
• Verifying Subcontractors: Before making payments to a subcontractor, contractors must verify their status with HMRC. HMRC will confirm whether a subcontractor is registered under the scheme and at what rate tax should be deducted (either 20%, 30% or 0%).
• Deducting Tax: Contractors must deduct tax from payments to subcontractors according to their CIS registration status. The standard deduction rate is 20%, but it may be higher (30%) if the subcontractor isn’t registered, or lower (0%) if the subcontractor has ‘gross payment’ status.
• Submitting Monthly Returns: Contractors are required to submit monthly returns to HMRC, detailing all payments made to subcontractors and the tax deductions. This must be done even if no payments were made during the month.
• Paying HMRC: Contractors must pass the deducted tax to HMRC by the 22nd of each month. Failure to make timely payments could result in penalties.

Key Responsibilities of Subcontractors

• Registering for CIS: While subcontractors are not required to register, it is highly recommended! Registered subcontractors will have tax deductions made at the standard rate (20%). If unregistered, the deduction rate will be higher (30%).
• Paying Tax: The tax deducted from payments by contractors is paid to HMRC. This deduction will count as advance payments towards the subcontractor’s annual tax bill.
• Filing Self-Assessment Tax Returns: Subcontractors must submit a Self-Assessment tax return to HMRC each year. Any tax already paid through CIS deductions will be offset against the subcontractor’s total tax liability.

What are the CIS deduction rates?

The deduction rates for CIS are as follows:

• 30% for unregistered subcontractors
• 20% for registered subcontractors
• 0% for subcontractors with ‘gross payment’ status

What is gross payment status?

For gross payment status, the contractor will pay the subcontractor in full and it lies with the subcontractor to pay all their Tax and National Insurance at the end of the tax year through their Self- Assessment.

To qualify for this status, subcontractors need to demonstrate the following:

• They are tax compliant – i.e. they have always paid their Tax and National Insurance on time
• They have a business based in the UK and in the Construction Industry
• They have a bank account tied to their business

On top of this, HMRC will also inspect their turnover for the last 12 months. Ignoring VAT and the cost of materials, their turnover must be at least:

• £30,000 for sole traders
• £30,000 for each partner in a partnership or £100,000 for the whole partnership
• £30,000 for each director of a company or £100,000 for the whole company

In addition to the above, companies owned by 5 individuals or fewer must have an annual turnover of at least £30,000 per person.