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November 8, 2023
If you are a contractor, the Construction Industry Scheme (CIS) is something that you will need to familiarise yourself with to avoid falling behind and facing penalties.
The Construction Industry Scheme (CIS) is a form of business tax that is applied to contracted work within the construction industry.
What do contractors need to do?
Ahead of paying a subcontractor to undertake construction work, you will need to register as a contractor for CIS.
You will also need to check the employment status of the subcontractor you are engaging with to determine whether they should be classed as an employee of the business or as a self employed subcontractor.
This can be difficult to differentiate, but where a subcontractor is classed as self-employed any payments you make to them would not have to be taxed through PAYE. If the individual should be treated as employee but you treat them as a subcontractor you run the risk of incurring significant HMRC penalties.
You can find out more about checking individuals’ employment status here.
Once confirmed that the person should be treated as a subcontractor, you will need to verify them with HMRC. HMRC will then confirm whether you should pay the subcontractor gross or after deducting tax, and they will confirm the rate of tax to apply.
It should also be noted that you will need to use commercial CIS software if you are verifying over 50 subcontractors.
When making payments to subcontractors the relevant deductions must be made and paid over to HMRC through the CIS payment scheme.
Monthly returns must be submitted to HMRC showing the payments made to subcontractors and all the relevant details.
What are the deduction rates?
As mentioned, HMRC should inform you of the deduction rate for each subcontractor, however, the general rates are:
The tax deduction should be applied to the labour element only, excluding the cost of materials and any VAT added to an invoice by the subcontractor.
For advice and support please contact Rachel Warriner, Head of Corporate Tax, at RMT Accountants & Business Advisors on 0191 256 9500 or via the contact us form.