CIS (Construction Industry Scheme) Explained
A scheme where construction industry contractors deduct tax from subcontractor payments before paying them. The standard deduction is 20% for registered subcontractors and 30% for unregistered ones.
What is CIS (Construction Industry Scheme)?
The Construction Industry Scheme (CIS) is a set of rules that require contractors in the construction industry to deduct money from payments to subcontractors and pass it to HMRC. These deductions count as advance payments of the subcontractor's tax and NI. The scheme aims to reduce tax evasion in the construction sector.
How it works
Contractors verify each subcontractor with HMRC before making payments. HMRC tells the contractor whether to deduct 0% (gross payment status), 20% (registered) or 30% (unregistered). The deduction applies to the labour element of the payment, not materials. Subcontractors can reclaim CIS deductions through their Self Assessment return or, if they are a limited company, through their Corporation Tax return.
Real example
A subcontractor invoices £5,000 for labour. The contractor deducts 20% CIS (£1,000) and pays £4,000. At year end, the subcontractor's total income is £60,000 with £12,000 in CIS deductions. Their actual tax liability is £9,432. They receive a refund of £2,568 from HMRC.
Who does this affect?
Self-employed workers and limited companies in the construction industry. This covers building, civil engineering, demolition, painting, decorating, and many other construction trades. Around 900,000 subcontractors and 150,000 contractors are registered under CIS. If you are a subcontractor, registering with HMRC is essential to avoid the 30% deduction rate.
HMRC source
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