What is CIS Tax and How Does it Work?

If you’re in the construction industry (or planning to be), you’ve likely heard people mention  Construction Industry Scheme (CIS) tax. This is a separate tax scheme that all in the construction industry must follow. If you need clarification on what it is, why it exists, or how it works, this article is here to answer your questions about CIS deductions.

Key Takeaways

• The Construction Industry Scheme (CIS) tax exists to streamline tax returns in the construction industry.
• Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
• You may register for CIS as a contractor or subcontractor on the HMRC website.
• Certain construction jobs are not obligated to pay into CIS, even if performed by a contractor.
• CIS is paid by contractors who deduct tax from their subcontractors’ paycheques.
• If you need a CIS refund, you can claim it online or by post.
• CIS is not the same as your Self-Employment tax. These must be dealt with separately.

Here’s what we’ll cover:

What is CIS Tax?

Who Must Sign Up for CIS?

How to Register Under the Construction Industry Scheme

Who is Exempt from CIS?

Example of CIS Tax

How to Make a CIS Refund Claim

The Construction Industry Scheme (CIS) vs Self-Employment Tax

Conclusion

Frequently Asked Questions 

What is CIS Tax?

The Construction Industry Scheme (CIS) tax is a specific tax scheme in the United Kingdom for the construction industry. This tax scheme aims to help construction businesses increase their revenue and reduce tax evasion.

The government established a separate scheme for the construction industry because it has a history of tax issues. Due to the often temporary nature of the work, taxes are too frequently misreported (accidentally or not). This special scheme is a way to help construction workers report their taxable income easier and more accurately. 

Who Must Sign Up for CIS?

All construction work falls under the CIS HMRC scheme. Contractors are legally required to register for CIS. This includes businesses (whether a public or private limited company) and individuals who work as contractors. This also includes property developers, building firms, and anyone offering construction work, even if it’s not their primary business model.

However, CIS does not apply to every individual who works on a construction site. For instance, individual employees who work for a construction company are not legally obligated to register for CIS. The company that they work for as an entity will have to.

Outsourced subcontractors can register, but it is not an obligation. Most subcontractors prefer to become registered subcontractors because it means that their tax deductions are calculated at 20% instead of 30%. 

How to Register Under the Construction Industry Scheme

CIS is an advantageous tax scheme that is worth signing up for. As a contractor, it’s a legal obligation. For subcontractors, a tax discount is more than enough incentive! So, how do you sign up?

Contractors

Every contractor must register under CIS by law. This is a requirement from the HMRC. Non-contractors must register, too, if they spend more than £3 million on construction within a 12-month period.

Here is how to register as a contractor under CIS step-by-step:

1. Go to www.gov.uk/register-employer to register as an employer
2. Follow the online process to register if you are a limited company with 1-9 directors. If not, contact HMRC for guidance
3. Set up your PAYE registrations
4. Check what benefits you must offer your employees
5. Get employer’s liability insurance
6. Once complete, the HMRC will send you a letter. This will give you the information you need to start hiring subcontractors under CIS.

Subcontractors

You don’t need to register for CIS taxes as a subcontractor. However, it does have a negative impact on your overall tax amount, so it’s probably worth doing.

Here is how to register as a subcontractor under CIS step-by-step:

1. Register as self-employed (sole trader)
2. You will then need the following to complete your registration:
   • your legal business/trading name
   • your National Insurance Number
   • the unique taxpayer reference number (UTR) for your business
   • your VAT registration number (if you’re VAT-registered)
3. If you don’t have a UTR, register for self-assessment first.
4. Complete your CIS subcontractor registration online using this website.

It’s important to note that as a construction professional, you’ll likely use CIS and self-assessment in tandem. If a registered contractor works with you, then they’ll pay you under CIS. If you work for average people, you’ll need your self-assessment details to declare those earnings. You can think of CIS as a subsect of self-employment. Not “instead of”–-“as well as.”

Who is Exempt from CIS?

Some work within the construction industry does not fall under the CIS scheme. In most cases, this is less about the “who” and more about the project itself. 

Such work includes:

• Any construction project that costs less than £1,000 to complete (excluding materials)
• Any projects funded by a charity
• Construction jobs on your own property for your own business use (excluding properties for sale or rent)
• Architecture
• Carpet fitting
• Scaffolding hire

Example of CIS Tax

At a high level, the way CIS works is that contractors deduct money from a subcontractor’s pay and then pay that money to the HMRC. For this reason, by CIS definition, a contractor is anyone who hires subcontractors, and a subcontractor is anyone who gets hired by a contractor. You should also bear in mind that these deductions count as advance payments towards the subcontractor’s tax and National Insurance. 

Here is a fictional example of how this might look.

Imagine your construction company hired Bobby, the builder, as an outsourced subcontractor. You must make tax deductions from Bobby’s paycheque as per CIS rules. If Bobby is a CIS registered subcontractor, then this deduction will be 20%. If he is one of the several unregistered subcontractors, the deduction will be 30%.

In other words, if you originally agreed to pay Bobby £1,000 for his work, he would get paid £800 if he’s registered or £700 if he’s not after you pay tax. Let’s take a closer look at the math around this £1,000 job:

Bobby is registered

• 20% of £1,000 = £200
• £1,000 – £200 = £800

Bobby is not registered

• 30% of £1,000 = £300
• £1,000 – £300 = £700

Then, you must include Bobby’s deductions on your monthly returns to the HMRC. This is important because Bobby will use it to claim his own tax deductions on his annual Self-Assessment tax return.

How to Make a CIS Refund Claim Online?

To claim a CIS refund online, simply sign into your Government Gateway account and claim your repayment. If you still need a Government Gateway account, you must register to claim refunds online.

However, you are not obligated to file your refund online. The HMRC also accepts claims by post. Simply mark your claim as CIS and mail it to:

PT Operations North East England
HM Revenue and Customs
BX9 1BX
United Kingdom

Keep in mind that all CIS refunds must be claimed before the annual April 5th tax deadline. If you file too late, your refund may not appear on your records for the previous tax year.

The Construction Industry Scheme (CIS) vs Self Employment Tax

For regular self-employed individuals, you’ll be paid the gross amount of income any contractor or client owes you. It’s then your responsibility to declare your earnings for HMRC to calculate your contributions.

The beauty of CIS is that your contractor can directly pay your tax and National Insurance by deducting it from your pay. This means that the final amount you get is all yours!

To qualify, however, there are a few considerations:

1. Are you actually self-employed?

Only some people in the construction industry are self-employed. If you have a traditional working contract, your National Insurance contributions and tax will be dealt with on your P45 as usual.

2. The work included in the Construction Industry Scheme is more diverse than you think.

It’s not just scaffolding and building work that qualifies. Demolition, repair service, and decorating work can also apply.

3. You can only access the CIS tax scheme through contractors.

If a homeowner hires you to do construction work on their premises, they are obligated to pay you your gross total invoice. Only professional contractors registered for the scheme can pay you this way.

4. The amount of tax the contractor deducts from your pay depends on you.

If you register under CIS, your tax payments are 20%. If you’re not registered, your tax payments are 30%. You don’t need to register as a subcontractor under CIS. But your contractor does need to register. If you both hire subcontractors and work as one, you must register as both.

Conclusion

While CIS is simple in theory, it can get complex in practice. You will inevitably deal with several different payments throughout your construction operations.

You can save the administrative burden by choosing FreshBooks as your accounting software. FreshBooks makes it easy to track income and expenses and generate accurate financial reports. These functions are built with CIS in mind, so you can be sure that FreshBooks is ready to help you with your business or other concerns.

For more guides on UK taxes like this one, head to our resource hub.

FAQs on What is CIS Tax

What are the benefits of CIS tax registration?

If you’re a contractor, it’s not a matter of benefits. It’s the law. Comparatively, subcontractors pay CIS through a tax deduction from their paycheques. CIS registration is optional for subcontractors, but unregistered subcontractors receive less money on their net payments per contract. Certain projects are exempt from this system. 

What are the penalties for non-compliance with CIS tax regulations?

If the HMRC recognises you as a contractor who should follow CIS, you will receive a fixed penalty charge of £100 if you are one day overdue on your filing. This extends to:

• A second fixed penalty of £200 if you’re 2 months overdue
• A further penalty which is the greater of £300 or 5% of any tax liability to make payments you should have if you’re 6 months overdue
• A further penalty for one year overdue could be either £300 or 5% of any liability to make payments or a ‘higher’ penalty of:
  • Up to 100% of any liability to make payments
  • A minimum penalty of £1,500 or £3,000

All penalties will increase if you deliberately withhold tax claims.

What are the rules for subcontracting work outside the UK?

CIS applies to all construction jobs done in or out of the UK. If you’re a UK contractor, you must file CIS, no matter where you work. Non-UK contractors who hire UK-based subcontractors also must register for and follow CIS rules for said subcontractors. 

Can I appeal against CIS tax assessments or penalties?

You have the right to appeal if you disagree with a CIS penalty. If you want to appeal, you should do it within 30 days of your CIS return submission. 

To do so, you may:

• Appeal online
• Send new information to your HMRC officer
• Consult a different HMRC officer
• Arrange for an independent tribunal 

What are the CIS tax rules for public sector contracts?

There is no difference in the rules between the public and private sectors. All contractors and subcontractors within the construction sector must follow the same CIS requirements. There is no additional tax within the CIS scheme based on your status as a public limited company.

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