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Construction Industry Scheme

The construction industry scheme (CIS) sets out the rules and regulations on payments made by contractors to subcontractors. These rules apply to construction industries as well as other businesses where contractors and sub-contractors are involved in construction work.

This scheme has its implementations similar to that of the PAYE system. Under CIS, a contractor must take into account the tax statement of the subcontractor. It requires deducting the amount payable to HMRC as tax from the part of the payment made to the subcontractor. The tax deductions are not made from the full payment, the part of the payment that represents the cost of materials incurred by the subcontractor is excluded from tax payments.

Following items shall be excluded while entering for the gross amount of payment while filing monthly returns:

  • VAT charged to the subcontractor
  • CITB levy (construction industry scheme levy)

While following payments shall be deducted from the gross amount of payment:

  • Amount paid by the subcontractor for construction material or any other related construction aid.
  • The cost incurred in the prefabrication of the material used during construction.

Under CIS only 20% is deducted if the subcontractor is registered with the HMRC, whereas 30% is deducted from the unregistered subcontractors.

Only the construction work done in the UK comes within the CIS scheme that also includes UK territorial waters up to 12 miles.

The types of work covered in CIS are:

  • Alteration
  • Dismantling
  • Site preparation
  • Construction
  • Repairs
  • Decorating
  • Demolition

Whereas the type of businesses covered by CIS is:

  • Self-employed individuals
  • Partnerships
  • Companies

Criteria to determining whether your business is the eligible gross payment status 

For your business to be eligible for GPS status, it must:

  • be providing its services within the UK and carries out its transaction through a bank account
  • have followed all the tax deadlines and always have submitted appropriate tax returns
  • have an annual turnover of at least £30,000 for every shareholder or for a sole trader

Registering for the scheme

  • You have to register for the scheme if you are hiring a subcontractor for construction work or your business doesn’t specifically involve construction work but your yearly expenditure on construction is more than £3 million.
  • You have to register for the scheme before paying your first subcontractor.
  • You have to register as an employer with HMRC and set up PAYE.
  • If you have to pay an employee before getting your employer PAYE reference number, you should run a payroll, store all payment submissions, and send late payment submissions to HMRC.

Registration and late filing penalties

HMRC can issue registration penalties for providing false information when applying for any deductions or gross payment status. Companies and individuals will be liable to a penalty if they control, influence, or encourage the person making a false application; if they are making a false application or providing HMRC with false documents to enable another individual to register for payment under deduction or GPS.

You will also be liable to late filing penalties for missing a return deadline, which you must pay within 30 days of receiving the notice, or you can appeal against it.

You can get more information regarding the penalties on GOV.UK website.

How can we help?

This article briefly describes the steps involved in complying with CIS. If you like to discuss any aspect of the scheme or what criteria under CIS apply to your business, Lyel Accountants is the right place for you. At Lyel Accountants, our expert legal team will walk you through every aspect of CIS.

If you would like more information regarding this, get in touch with us on 0113 436 0002 or use the form below.