The Construction Industry Scheme (CIS) sets out how tax is managed for subcontractors working in construction across the UK. Under CIS,contractors are required to withhold tax from subcontractor payments and send it to HMRC. The scheme is designed to reduce tax evasion and improve overall tax compliance in the sector. If you’re a subcontractor, knowing how CIS tax rates apply to you is crucial. It can help you avoid paying too much or too little tax and give you more control over your cash flow and financial planning. In this guide, we explain how CIS tax deductions work, what rates apply, and how you can manage CIS payments more effectively.
What Is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax initiative set up by HM Revenue and Customs (HMRC) to manage tax deductions for workers in the construction sector. Under the scheme, contractors are required to deduct tax from payments made to subcontractors and pass those deductions directly to HMRC.
CIS applies to:
- Contractors: Businesses or individuals who hire and pay subcontractors to carry out construction work.
- Subcontractors: Businesses or individuals who are hired to perform construction work for a contractor.
CIS applies to various types of construction work such as, building, demolition, installation of systems (like plumbing or electrical work), and site preparation. Some activities, like surveying or architecture, are not included under the scheme.
How CIS Tax Deductions Work
Contractors are responsible for deducting tax from subcontractors’ payments. The deductions are made at the time of payment to the subcontractor based on the subcontractor’s registration status with HMRC. These deductions are then passed on to HMRC, which helps subcontractors meet their tax obligations.
Who deducts the tax?
Contractors are responsible for deducting tax from the subcontractor’s payment before paying them. Contractors must verify the subcontractor’s registration status with HMRC to determine the appropriate deduction rate (30%, 20%, or 0%).
When is it deducted?
Tax is deducted at the time of payment to the subcontractor. Contractors should ensure the appropriate deduction rate is applied based on the subcontractor’s registration status.
What payments are affected?
CIS deductions only apply to payments for labor. Materials, VAT, and other expenses are not subject to deductions under CIS. Subcontractors should ensure that labor costs are clearly separated from material costs on their invoices to avoid any confusion and ensure only the labor portion is taxed.
CIS Tax Deduction Rates Explained
Under the Construction Industry Scheme (CIS), tax deduction rates depend on the subcontractor’s registration status with HM Revenue and Customs (HMRC). The current CIS deduction rates are:
Unregistered Subcontractors (30% Deduction Rate)
If a subcontractor has not registered with HMRC or if their details cannot be verified, contractors are required to deduct 30% from their payments. This is the highest deduction rate and can significantly impact cash flow for subcontractors.
Registered Subcontractors (20% Deduction Rate)
Subcontractors who are registered with HMRC under the Construction Industry Scheme (CIS) will have a 20% deduction applied to their payments. This is the standard rate for registered subcontractors.
Gross Payment Status (0% Deduction Rate)
Subcontractors with Gross Payment Status do not have any tax deducted at source. Instead, they are responsible for paying their tax and National Insurance contributions directly to HMRC at the end of the tax year. To qualify for Gross Payment Status, subcontractors must meet certain criteria, including:
- A good compliance history with HMRC, including up-to-date VAT obligations..
- Evidence of business activity in the construction industry.
- Satisfactory business records.
- A Minimum turnover of:
- £30,000 for sole traders
- £30,000 per partner or at least £100,000 for the whole partnership
- £30,000 per director or at least £100,000 for the whole company
- If the company is controlled by 5 or fewer people, each must have a turnover of at least £30,000 (excluding VAT and materials)
Subcontractors can apply for Gross Payment Status when registering for CIS. If approved, contractors will pay them in full, without deductions, and the subcontractor will handle their tax obligations directly.
What CIS Tax Deductions Apply to the Construction Industry
Under the Construction Industry Scheme, tax is only deducted from the labour part of a payment. CIS does not apply to materials, VAT, plant hire or other expenses. It is important to show labour and materials as separate items on your invoices. If you do not do this, the contractor might deduct tax from the full amount, including materials. This could lead to paying more tax than necessary. Here are some common items that are not subject to CIS deductions:
- Materials bought for the job
- Plant or equipment hired from another business
- Fuel used by hired or owned equipment
- Consumable items used for the work
- VAT charged on the invoice
If material costs are not shown clearly, the contractor can make a reasonable estimate. To avoid mistakes, always give a clear breakdown of costs on your invoice. Read more details from HMRC official guide on Construction Industry Scheme.
Our Tips to Avoid Issues with CIS Deductions
Follow these simple tips to make sure CIS deductions are handled correctly, and your payments stay accurate.
- Register Early: It’s crucial to register with HMRC before you start working under CIS. Registering early means you are taxed at the correct rate and helps prevent delays or errors in your payments.
- Keep Invoices Clear: Always separate labor costs from materials and VAT on your invoices. This helps contractors apply the correct deductions and prevents overpayment of tax.
- Use HMRC’s Online Tools: Take advantage of HMRC’s CIS online services to verify subcontractors, file monthly returns, and track your payment history. These tools help reduce errors and keep your records up to date.
- Claim Refunds Efficiently: HMRC now provides an online repayment claim form for limited companies that have overpaid CIS deductions. Use this to request refunds faster and keep your cash flow on track. Read our full guide on how to claim a CIS refund to speed up the process and avoid delays.
- Get Professional Advice When Needed: If you’re uncertain about CIS rules or your deductions, speak to a qualified accountant or CIS specialist. Professional advice can help you avoid mistakes and keep your tax affairs in order.
In Summary, understanding CIS tax rates and deductions is essential for any subcontractor working in the UK construction sector. Registering with HMRC, sending clear invoices, and keeping up with your tax responsibilities, you can stay compliant and avoid unnecessary deductions.
Need help with CIS tax or unsure about your obligations? Get in touch today for a free consultation and expert advice based on your business needs.
