In the UK, if you are a contractor, there are certain rules that you need to follow. The CIS or the Contractor Industry Scheme pertains to the same. Under this scheme, the contractors in the UK are to deduct the payments made to the various individual subcontractors and are required to pass such details to the HMRC. All payments processed under this scheme must take account of the subcontractor's tax status as specified by the HMRC.
In a nutshell, under this scheme contractors are to deduct an amount from the subcontractor’s pay and are required to pay the amount of the deduction to the HMRC. However, it must be noted that such deductions do not include the cost of procuring materials on the end of the subcontractor.
What kinds of works are covered under this scheme?
There are many kinds of contracting work types that are covered under CIS. Here is what the list covers:
- Site Preparation
This scheme does not cover any contracting work that is done outside of the UK and the territory of the UK. The territory of the country extends up to 12 nautical miles in the territorial waters of the UK.
What are the types of businesses that are covered by the scheme?
The CIS scheme covers all kinds of contracting businesses and other kinds of businesses that perform works in the contracting industry. The kinds of businesses that fall under CIS are:
- Self-employed persons
These businesses could be created by or could involve contractors, subcontractors or both contractors and subcontractors.
What do you mean by the term “contractor”?
CIS has a special definition for the term “contractor.” Under this scheme, the contractor is any person or business that pays subcontractors for their construction work. These contractors may include:
- Building firms and
- Government departments and local authorities.
Furthermore, the concerned party to whom these contractors offer their services to are generally termed as “clients.”
Under this scheme, private householders are not considered as contractors. However, any business with an average annual expenditure of £1 million on activities related to construction or more for 3 consecutive years should be considered as “contractor” under CIS.
What do you mean by the term “subcontractor”?
CIS defines subcontractors as those individuals or businesses that work under contractors and is paid by such contractors for their construction services.
What happens when a firm or an individual works as both, a contractor and a subcontractor?
When a firm or an individual works both as a contractor and a subcontractor, the CIS has a simple way of ascertaining which kind of definition applies to such businesses. In this case, the business will be considered as a subcontractor when the business is working on a project as a subcontractor. And when the same business is working on a project as a contractor and hires subcontractors to work under them, then such business will fall under the ambit of the definition of contractors as specified by the CIS.
Is registering for such a scheme mandatory?
The registration for businesses under CIS is important. All contractors and subcontractors are required to register with HMRC. If a subcontractor does not wish to have deductions from their payments at a higher rate, then such subcontractors should register with HMRC as well. HMRC will make a note of your requirements and will furnish documents specifying your requirements to the contractors.
What should a contractor do while processing the payments to a subcontractor?
Before a contractor processes the payment with deductions to the subcontractor, such contractor must first check with the HMRC. The contractor should furnish all the details about the subcontractor to the HMRC, and the HMRC will get back to the contractor with the details of the subcontractor. Furthermore, the HMRC will tell the contractors if the payments to the subcontractor can be made after deductions or without any deductions.
How are deductions made under CIS?
When a contractor pays or processes the payment to the subcontractors, then such payments should be made only after verifying the status of the subcontractor with the HMRC. Furthermore, there are some specific rules to be followed by the contractor when the payments are made.
After verifying with the HMRC, the contractor is to deduct the amount of money from the payment of the subcontractor and pay the same sum of money to the HMRC. In the case where the contractor does not deduct any sum of money from the payment processed, then the contractor is required to pay the subcontractor in full.
How are the deductions to be calculated?
When the contractor deducts an amount of money from the payment of the contractor, the contractor must consider and follow the following rules:
- The contractor must calculate the amount of money to be deducted.
- The contractor must keep a record of the deduction so made.
- Make the deduction from the subcontractor’s pay.
- Pay the amount deducted to the HMRC.
- Complete the status and the statement of such deduction and furnish the same to the contractor.
Are there any returns to be filed with the HMRC?
When a contractor is working in the territory of the UK, then the contractor must file monthly returns with the HMRC stating the deductions that were made during the month or informing the HMRC that there were no deductions made during the month.
The return filed with HMRC must contain the following:
- All relevant details of the subcontractors.
- All details regarding the payments made and details of the deductions withheld.
- A statement of the subcontractors that have been hired by the contractor.
- A statement of subcontractors that needed to be verified and have been verified by the contractor.
How are the payments to the HMRC made?
The payments for deductions so made by the contractor must be made monthly, usually and in some cases quarterly.
When to register?
The time to register with the HMRC for contractors and subcontractors can be done before the work begins. The procedure for such registration can be done online as well.