How does CIS Work for Contractors and Subcontractors?

Everything You Need to Know

The Construction Industry Scheme, more commonly known as CIS within the industry, is something that all contractors and subcontractors will have to deal with at some point.

What is CIS in accounting, though, and how does it work? Here is everything you need to know about CIS work, from a breakdown of the tax rates to what will happen if a contractor does not deduct it.

Summary

• CIS is a tax deduction system specific to the construction sector
• You need to register for CIS if you are a contractor who pays a subcontractor to carry out construction work
• There are a number of different CIS rates that apply to subcontractors
• Failing to pay CIS on time can lead to heavy fines

What is CIS in accounting?

CIS is a tax system that was put together by the UK government. It was introduced to regulate tax payments within the construction sector more effectively. There are rules for contractors and subcontractors to ensure that tax is correctly deducted at the source before payments are made.

CIS was brought in to make the process of collecting tax revenue from construction work easier, and the whole system is now a lot more transparent as a result, even though it might not feel like that to you right now! Luckily, that is where we come in.

Who needs to register for CIS?

If you are a contractor who pays a subcontractor to carry out construction work in the UK, then you need to register for CIS. If you are a subcontractor, you yourself are not required by law to register. You really should, though!

If you don’t, contractors can deduct 30% tax from your payments, and being registered will lower this. If your business makes construction payments and receives them, then you are both a contractor and subcontractor. We will ensure that you understand what regulations apply to both, reducing any confusion.

CIS tax rates explained

When you pay a subcontractor, you will need to make some deductions from their payments. This is decided by HMRC, who will tell you the amount that needs to be taken off.

The CIS deduction rates are:
• 30% for unregistered subcontractors
• 20% for registered subcontractors
• 0% if the subcontractor has ‘gross payment’ status

You must pay these deductions to HMRC as they count as advance payments towards the subcontractor’s tax and National Insurance bill.

What happens if a contractor does not deduct CIS?

If you are a contractor and you do not deduct CIS, you will be fined by HMRC. You’ll be liable for this even if your monthly return is just one day late, and the later you leave it to pay, the higher the penalty will be.

Here is a breakdown of what you can expect to pay, depending on when you file:
• A fixed penalty of £100 if your return is one day late.
Then, if you continue to not pay what is owed, the following will apply:
• 2 months after the date it was due: A second fixed penalty of £200
• 6 months after the date it was due: A further penalty of £300 or 5% of any liability to make payments that should have been shown in the return
• 12 months after the date it was due: A second penalty, which will depend on why your return was late.

This will be either £300 or 5% of any liability to make payments. It can also be a higher penalty of up to 100% of any liability to make payments, or a minimum penalty of £1,500 or £3,000. HMRC will charge this higher penalty if they discover that you deliberately withheld information from them.