The Construction Industry Scheme (CIS) is designed to ensure that the government collects tax from individuals working in the construction industry. Under the scheme, contractors (businesses or individuals who pay subcontractors for construction work) are required to deduct a percentage from the payments they make to subcontractors and pass that onto HMRC. This helps HMRC to collect tax in a manner that aligns with the contractor-subcontractor relationship.

• Contractors: If you are a business or individual paying subcontractors for construction work, you are generally required to register as a contractor under CIS. Contractors can be large firms or sole traders, and they are required to deduct tax at source when paying subcontractors.
• Subcontractors: If you are a subcontractor working under the scheme, you should be registered with HMRC as a subcontractor. Your registration determines the tax deduction rate that contractors will apply when paying you.

CIS operates by requiring contractors to deduct a percentage from the payments made to subcontractors. There are three tax deduction rates under CIS:

1. 20% – This is the standard deduction rate for subcontractors who are registered with HMRC.
2. 30% – This higher deduction applies to subcontractors who are not registered with HMRC.
3. 0% – This applies to subcontractors with gross payment status (i.e. those who have applied and been approved by HMRC).

These deductions are paid to HMRC on behalf of subcontractors and are credited towards the subcontractor’s tax liability for the year.

As a contractor, you have several critical responsibilities under the CIS. These include:

1. Register with HMRC: If you haven’t already, ensure that your business is registered under the Construction Industry Scheme (CIS). Failing to register as a contractor could lead to penalties.
2. Verify Subcontractors: Before making payments to subcontractors, contractors must verify each one with HMRC to ensure that the correct tax deduction rate is applied. This can be done online through the HMRC portal.
3. Deduct the Correct Amount: Contractors are required to deduct tax at the appropriate rate (20%, 30%, or 0%) from subcontractor payments. The rate depends on whether the subcontractor is registered and the type of work they are carrying out.
4. Pay Tax to HMRC: Contractors must remit the tax deductions to HMRC, usually on a monthly basis, alongside a monthly CIS return.
5. Maintain Accurate Records: Contractors should keep detailed records of all payments made to subcontractors, including the tax deductions, for at least three years. This includes retaining copies of invoices, payment receipts, and verification records.
6. Submit Monthly CIS Returns: Contractors are required to submit a monthly CIS return to HMRC, even if no subcontractors were paid in a particular month. This return reports the tax deducted and the payments made to subcontractors.
7. Issue Payment Statements: Contractors must provide subcontractors with a payment statement that shows the amount of payment made and the tax deducted. This can be done on the same day the payment is made.

As a contractor, you must file your tax return correctly and on time to avoid penalties. The tax return for a contractor includes the following:

1. Self-Assessment Tax Return (SA100): If you are a self-employed contractor, you will need to submit a Self-Assessment tax return each year, in addition to your CIS responsibilities. Your income will include both the income you receive from your construction work and any tax deductions that have been made on your behalf.
2. CIS Return (CIS300): In addition to the SA100, contractors must submit a monthly CIS300 return to report payments to subcontractors and tax deductions made. This must be submitted by the 19th of each month after the month in which the deductions were made.
3. Paying Your Tax: After the tax year ends, you will need to calculate the total tax you owe to HMRC, taking into account the deductions already made. If the tax deducted under CIS exceeds your overall tax liability, you may be entitled to a refund.
4. Filing Deadlines: The deadline for filing your Self-Assessment tax return is typically 31 January following the end of the tax year (5 April). However, if you’re filing a paper return, the deadline is 31 October. Make sure to file your returns on time to avoid interest and penalties.

• Failure to Verify Subcontractors: If you fail to verify your subcontractors with HMRC, you could face penalties, and subcontractors may face unnecessary deductions at the higher rate.
• Late Payments and Returns: Always ensure that CIS returns and tax payments are made on time to avoid interest or penalties. Late filings could also affect your future ability to engage with subcontractors under CIS.
• Not Keeping Proper Records: You must maintain accurate and detailed records of all payments made to subcontractors, tax deductions, and monthly returns. In case of an HMRC audit, proper records are essential.