How to operate the Construction Industry Scheme (CIS) as a limited company or sole trader

Contractors and subcontractors working in the construction sector need to be aware of the Construction Industry Scheme (CIS).

The Construction Industry Scheme (CIS) is a tax collection system in which contractors undertaking construction work must deduct income tax from payments to subcontractors and account for that tax to HMRC as payments on account.

These CIS tax deductions are treated as advance payments towards a subcontractor’s income tax and National Insurance Contributions.

Choosing whether to operate under the Construction Industry Scheme (CIS) as a sole trader or a limited company will present differences in how tax deductions are made and the income tax you pay. CIS tax can be complex, so seek professional advice from specialist accountants such as dns accountants.

In this blog, we cover the key points to note how to operate the construction industry scheme as a limited company or sole trader.

What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) is an HMRC tax scheme in the UK to ensure that all subcontractors working in the construction industry pay the correct amount of tax.

It applies to all construction work in the UK, including repairs, maintenance, and alteration work.

Its purpose is to ensure that contractors deduct tax at the source when they pay subcontractors for work undertaken and pay that deduction directly to HMRC. This scheme minimises tax avoidance by self-employed individuals in the construction sector. CIS deductions are treated as advance payments towards a subcontractor’s tax and National Insurance contributions.

CIS applies to sole traders, partnerships and limited companies involved in construction operations and civil engineering work etc (see below for a full breakdown of who it applies to).

What work is covered by the Construction Industry Scheme?

CIS includes the following types of construction projects:

• A permanent or temporary building or structure.

• Civil engineering works, such as roads and bridges.

Construction work covered by CIS includes:

• Preparing a site, including laying foundations or providing access works.

• Dismantling and demolition.

• All types of building work.

• Repairs, alterations and decorating

• Installing systems such as heating, lighting, power, water and ventilation

• Cleaning inside buildings following construction work.

You are not required to register if you only do specific jobs, for example:

• Architecture and surveying.

• Scaffolding hire (without labour).

• Carpet fitting.

• Manufacturing materials used in construction, including plant and machinery.

• Delivering materials.

• Work on construction sites not directly related to the construction itself, such as running a canteen or other on-site facilities.

Definition of contractors vs subcontractors

You must r as a contractorregiste with the Construction Industry Scheme (CIS) if:

• You pay subcontractors to do construction work.

• Your business does not do construction work, but you spent more than £3 million on construction in the 12 months since you made your first payment.

What you must do as a Construction Industry Scheme subcontractor

If you work for a contractor and you are one of the following, you should register for the Construction Industry Scheme (CIS):

• a sole trader

• a limited company owner

• a partner in a partnership or trust

CIS deductions

Under the Construction Industry Scheme rules, contractors must deduct 20% from their payments, and the tax deducted must be passed on to HMRC. This is known as ‘net payment status’ (also known as ‘payment under deduction’).

CIS payments

These CIS deductions are treated as advance payments towards your income tax and National Insurance bill as a subcontractor.

Higher tax deductions will be made if you are a subcontractor and do not register for the scheme. In this case, contractors must take CIS deductions of 30% from your payments/taxable income.

If you do not want deductions made as a subcontractor

If you do not wish for deductions to be made in advance by contractors that you subcontract to, you can apply for ‘gross payment status’. If you’ve not already registered, applying for gross payment status will automatically register you for the Construction Industry Scheme (CIS).

Construction Industry Scheme for sole traders

Registration process for sole traders

The steps for the registration process are as follows:

1. Register as a Sole Trader with HMRC: Before registering for CIS, you need to be registered as a sole trader with HMRC. You must register for self-assessment (if you haven’t done so already).

2. CIS Registration: Once you have registered with HMRC, you can register for CIS. Registration is straightforward and can be completed online via the HMRC website. You will need your Unique Taxpayer Reference (UTR) number, Government Gateway User ID, National Insurance number, and business details.

3. Verify Your Status with Contractors: Once you register for CIS, your contractor must verify your registration with HMRC. Once you’re verified, the contractor can begin making CIS deductions, making CIS payments to HMRC, and providing you with payment and deduction statements.

Construction Industry Scheme deduction rates, overpaid tax and refunds

• 20% Rate: If you have registered for CIS, you will have 20% of your payments deducted by the contractors you work for. These CIS deductions may not cover your full income tax and NI liability for the tax year. They will merely act as payments on account towards your tax bill. You must complete a self-assessment tax return at the end of every tax year. At this point, you will be required to pay any additional tax owed or reclaim any excess deductions made if the amount deducted was greater than your tax liability for that tax year.

• 30% Rate: If you are not registered under the CIS, your contractors must deduct 30% from your CIS payments. However, this amount can also be reclaimed via self-assessment if it exceeds your tax liability for that tax year.

Your contractor should provide monthly payment and deduction statements. Use these statements to calculate whether you still owe tax and National Insurance to HM Revenue and Customs (HMRC) or are due a refund.

How is CIS affected by IR35/Off-payroll working?

The off-payroll working rules (also known as IR35) ensure that a worker (i.e., a contractor) Pays broadly the same income tax and national insurance as an employee.

The rules apply if the contractor provides services via an intermediary that would have been classed as an employee if they provided their services directly to that client.

IR35 does not usually apply to individuals working as a sole trader business who pays Income Tax and National Insurance through the annual Self-Assessment process. However, IR35 rules do apply where a sole trader works on a contract basis for a client and could be deemed to have an employee/employer relationship. This will be based on the day-to-day working practices and the benefits the contractor gets. If this is considered the situation, the client would be seen as the employer of the contractor and liable for normal employment taxes.

Construction Industry Scheme for limited companies

CIS registration is not mandatory for limited companies unless they act as contractors.

CIS for limited company subcontractors works similarly to sole traders, but there is one main difference.

If you work as a subcontractor and operate through your own limited company, CIS deductions can be offset against your limited company corporation tax bill, rather than an income tax bill as a sole trader.

This is because the contractor will pay the subcontractor’s limited company, not the individual and companies are liable for corporation tax, rather than income tax.

The construction industry and the wide use of contractors and subcontractors mean that CIS rules and tax are very complex.

If your limited company or you as a sole trader are only a subcontractor

• You work for a contractor who pays you or your limited company as a CIS subcontractor.

• The contractor deducts 20% or 30% of CIS payments (depending on whether you are CIS registered).

• You or your company does not employ any self-employed subcontractors for this work.

What must the main contractor do?

The main contractor must file a monthly report to HMRC showing its subcontractor CIS deductions, including you or your limited company.

What must the subcontractor do? If you are a limited company

Your limited company must include the CIS deductions made by the contractor through an Employment Payment Summary (EPS). Your company must submit an EPS as part of its PAYE arrangements in the tax year.

The Final Payroll Submission (FPS) must be submitted at the end of the tax year. HMRC will use the total CIS deductions to reduce your company’s Corporation Tax bill. If CIS credit remains, it will be refunded to your company by HMRC.

What must the subcontractor do? If you are a sole trader

You must include the CIS deductions from the contractor(s) you work for on your annual self-assessment. The deductions will reduce your income tax bill. Any CIS credit left over will be refunded to you by HMRC.

If your limited company is paying subcontractors

• Your limited company is paying subcontractors to do work.

• None of the work is for another contractor.

What must you do?

Your limited company must complete a monthly report to HMRC. This report details the amount of CIS deductions made from subcontractors working for you. The report must include all individuals and businesses employed by your company as CIS subcontractors.

Your limited company must pay the deductions made to HMRC, just as other PAYE taxes are paid.

If you’re a sole trader and are paying subcontractors

• You work as a sole trader, but you pay subcontractors to work on your behalf.

• None of the work is for another contractor.

What must you do?

As a sole trader, you are not required to run a payroll to pay yourself. However, to pay subcontractors, you must run CIS payroll and complete a monthly report to HMRC. The report must include all CIS deductions made for all individuals and businesses you employ as CIS subcontractors.

You must pay the deductions made to HMRC, just as other PAYE taxes are paid.

You or your limited company works for a contractor and is paying subcontractors

• You or your limited company provide services to a contractor and uses subcontractors for some or all of the work.

This gets a little more complex as you’ll need to:

• The contractor will make CIS deductions from its payments to you or your limited company.

• You or your limited company make CIS deductions from the payments to subcontractors working for you.

• The difference between these amounts will be refunded or paid to you via corporation tax (for limited companies) or self-assessment (for sole traders).

If you’re a sole trader, you must operate CIS payroll for any of your subcontractors.

How dns accountants can help

dns accountants provides specialist construction accounting services for limited company contactors, self-employed subcontractors and limited company subcontractors undertaking construction work. We’ll ensure you meet the Construction Industry Scheme (CIS) regulatory requirements.

dns accountants work with hundreds of companies in the UK construction industry, property businesses in the UK, and contractors in the construction industry. Our services include support and advice on:

• CIS scheme rules.

• CIS registration process.

• CIS compliance.

• CIS tax deductions.

• CIS tax offsets against other tax liabilities, such as VAT and Corporation Tax.

• Employment status.

• CIS accounting.

• Deduction statements.

• Self-assessment tax returns.

• Corporation tax returns.

• Accounts production

• VAT registration.

• VAT reverse charge rules.

• Tax planning.

• Bookkeeping.

If you want specialist CIS, property and construction accountants advising you, contact our specialist today on 03330605328, or e-mail us at enquiry@dnsaccountants.co.uk.

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