You might be already familiar with Construction Industry Scheme (CIS) tax matters if you involved in construction industry. In this article, we will have a closer look on CIS tax matters for Contractors regarding what is CIS, how does it work and its compliance.
What is Construction Industry Scheme (CIS) Tax?
The CIS tax system is designed by HMRC to collect the income tax from those people working in the construction industry. The tax is compiled throughout the year (monthly basis) like tax deducted under the PAYE scheme.
The constructor requires to register for the CIS and is liable to deduct the right amount of the CIS tax from their subcontractors. There are three rates of the CIS tax as follows:
- No tax deduction if the contractor has the “Gross Payment Status”
- Deduction at normal rate of 20% if the subcontractor is registered for CIS
- Deduction at higher rate of 30% if the subcontractor is non-CIS registered and you are unable to verify them
The most construction activity is under the CIS tax regime including building works, demolition, alterations, the site preparation and more. However, some certain jobs (architecture, scaffolding, carpet fitting, delivery materials) are not subject to the CIS tax.
How Does the CIS Tax Work?
The construction company (contractor) deducts the CIS tax on behalf of their workers (subcontractors) and pays the tax amount to HMRC. The subcontractors will receive the net amount with any material costs from the contractor.
For example: ABC Construction Ltd hires Mr. Smith as their subcontractor and each month he is owed £2,000 as labour charge and the cost for any materials where applicable. On the labour charge, ABC pays the CIS tax £400 (20% of the £2,000) to HMRC and the net of £1,600 plus the materials costs to Smith. The company gives the CIS statement or payslip to Mr. Smith as a proof.
Please note that an employee cannot be treated as a subcontractor: only self-employed individual or a company. They may be eligible for the CIS tax refund and should claim for their refund.
The Compliance Matters for the CIS Tax?
You need to register for the CIS tax if you are a contractor and pay the subcontractors for their construction work. The contractor can be a sole trader or limited company and you need to apply to HMRC as a new employer. If you have already PAYE registration details, you need to call HMRC and request for the CIS tax registration.
As a contractor, you should deduct the correct CIS tax amount from the subcontractors and submit the return with the tax payment to HMRC on time. The deadline is 19th of every month following the last tax month. For example: the tax month of 6 April to 5 May should be submitted and paid by 19 May. You can pay by 22nd if paying online. You may be subject to penalty charges if the CIS tax return is not submitted on time and failure to pay within the deadline.
After the deduction made and the return submitted, you should give the CIS statement or payslip to your subcontractors as proof and they need this for their tax returns.
Looking for CIS Tax Service?
At The Stan Lee, we pride to offer the CIS tax services from the registration to the CIS tax computation, return submission and other ad hoc CIS affairs at reasonable fees for your construction business. Please contact us and let’s find out how we can support on your CIS tax requirements.