Sarah Bradford explores the construction industry scheme and explains what action contractors need to take when engaging workers under the scheme.
Special tax rules apply to the construction industry; the way in which workers are treated for tax purposes will depend on whether the worker is an employee or self-employed.
If the worker is self-employed, the construction industry scheme (CIS) applies. The scheme requires the contractor to make a deduction on account of tax and pay it over to HMRC unless the subcontractor is registered for gross payment.
Checking status of workers
Before considering the requirements of the CIS, it is necessary to determine whether a worker is employed or self-employed. The usual tests apply.
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Characteristics of employment and self-employment |
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Employed |
Self-employed |
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The worker is required to work regularly unless they are on leave. |
The worker is in business for him or herself and responsible for the success or failure of business. |
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The worker is required to work a minimum number of hours each week and expects to be paid for the time worked. |
They may make a profit or a loss. |
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The worker’s manager or supervisor is responsible for their workload and determining when a piece of work should be completed and how it should be done. |
They can decide what work they do, when and where and how they do it (subject to the requirements of client/job). |
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The worker must do the work personally – they can’t send someone else. |
They can hire someone else to do the work – they do not need to do it personally. |
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They receive paid holiday and are entitled to SSP and statutory maternity, paternity or adoption pay. |
They agree a fixed price for a job rather than being paid for the time that they work. |
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They work at the business premises or at an address specified by the business. |
They fix any unsatisfactory work in their own time. |
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The business provides the tools and material that they need to do their job. |
They provide the tools that they need to do the job and meet the running costs of the business. |
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They work only for the business and if they have another job, it is different from the work they do for the business. |
They can work for more than one client. |
The status of a worker can also be checked using HMRC’s online check employment status for tax (CEST) tool, which can be found on the Gov.uk website at www.gov.uk/guidance/check-employment-status-for-tax.
Construction worker is an employee
If after applying the employment status tests, the decision is that the construction worker is an employee, the engager should add the worker to the payroll and apply PAYE and National Insurance contributions in the usual way. The CIS is not in point.
Construction worker is self-employed
If the application of the employment status tests reveals that the construction worker is self-employed, the engager will need to comply with the requirements of the CIS.
Nature of the CIS
The CIS is a special scheme that applies to contractors in the construction industry who engage subcontractors to carry out work. The scheme covers most construction work to buildings, including site preparation, decoration, and refurbishment. A contractor must register with the CIS if they pay subcontractors to undertake construction work.
A mainstream contractor is one whose main business is construction and the business pays subcontractors for construction work. A contractor can be an individual, a partnership or a limited company.
A business must also register as a contractor under the CIS if it does not do construction work but usually spends more than £1million a year on construction (a deemed contractor).
Requirements of the scheme
Under the CIS, the contractor must:
- register as a contractor under the scheme before taking on their first subcontractor;
- check the employment status of the worker to see if they should be treated as an employee;
- for all subcontractors, check with HMRC whether they are registered under the CIS;
- make deductions from amounts paid to subcontractors at the appropriate rate in accordance with their subcontractor status and pay sums deducted over to HMRC;
- file monthly CIS returns and keep full records;
- notify HMRC of any changes to the business.
Registering as a contractor
To register as a contractor under the CIS, the business should register as an employer with HMRC. This can be done online. Guidance on how to do this can be found on the Gov.uk website at www.gov.uk/register-employer.
Once the contractor has registered, they should receive a letter from HMRC containing the information they need to start working under the scheme. HMRC’s CIS helpline (0300 200 3210) can provide help with registering.
Who is a subcontractor?
A subcontractor carries out construction work for a contractor. A subcontractor may be a self-employed individual, the owner of a limited company or a partner in a partnership.
Registering as a subcontractor
Under the CIS, subcontractors must register with HMRC. Subcontractors who are not registered with HMRC under the scheme will be subject to a higher rate of deduction than registered contractors. Subcontractors can apply to HMRC to be paid gross provided they meet certain qualifying conditions.
Guidance on how to register as a subcontractor can be found on the Gov.uk website at www.gov.uk/what-you-must-do-as-a-cis-subcontractor/how-to-register.
Verifying subcontractors
Before making payments to a subcontractor, the contractor must carry out a verification process to ascertain the correct rate of deduction to apply to payments made to the subcontractor. Verification is a three-step process:
- The contractor contacts HMRC with details of the subcontractor;
- HMRC checks whether the subcontractor is registered under the CIS;
- HMRC tells the contractor what rate of deduction to apply.
The contractor does not need to verify a subcontractor again if they have included that subcontractor on a return in the current or two previous tax years.
Once HMRC has verified a subcontractor, they will provide the contractor with a verification number.
Making deductions and paying subcontractors
Depending on the status of the subcontractor, the contractor may need to make a deduction from payments made to that subcontractor. The deduction rates under the scheme are:
- 0% if the subcontractor is registered for gross payment status;
- 20% if the subcontractor is registered but does not have gross payment status; or
- 30% if the subcontractor is not registered under the scheme.
Only subcontractors with gross payment status can be paid without deduction.
To make a deduction under the scheme, the starting point is the gross amount on the subcontractor’s invoice. The contractor should then deduct amounts paid by the subcontractor for:
- VAT;
- materials;
- fuel (other than for travelling);
- plant hire; and
- manufacturing or prefabricating materials.
A deduction is made at the appropriate rate from the balance. The amount deducted must be paid over to HMRC with any payments of PAYE and NICs by the 22nd of the month where the payment is made electronically, or by the 19th of the month if payment is made by cheque.
The contractor must give the subcontractor a payment and deduction statement within 14 days of the end of the month (see www.gov.uk/government/publications/construction-industry-scheme-payment-and-deduction-certificate).
The subcontractor can set the amount deducted against his or her tax liability, claiming a refund if the deductions exceed the final liability.
Monthly returns
The contractor must also file monthly returns with HMRC. This can be done online using HMRC’s CIS online service or by using commercial CIS software. Subcontractors who are not treated as employees must be listed on the return.
Contractors should take care to get this right as they may be liable for a penalty of up to £3,000 if the wrong employment status is provided for a subcontractor on a monthly return. Penalties are also charged for late returns.
There is no need to file a return for a month when no payments are made to subcontractors, but the contractor must tell HMRC that no payments are due.
Record keeping
A contractor must keep records of the gross amount of each payment invoiced by the subcontractor excluding VAT and of any deduction made from payments to the subcontractors. Where a deduction is made, records should also be kept of the materials invoiced by the subcontractor, excluding VAT.
The contractor may be fined up to £3,000 if they are unable to provide records if requested to do so by HMRC.
Get it right!
It is important that contractors understand and comply with the requirements of the CIS, as penalties for non-compliance can be high.
