What is CIS and The Technicalities Involved
For people self-employed in the building and construction industry in the United Kingdom the government has laid out tax rules and regulations under HMRC. These regulations are more commonly known as the CIS or the Construction Industry Scheme.
CIS falls under the HMRC (Her Majesty’s Revenue and Customs) and is designed to reduce and minimize tax evasion among self-employed construction industry workers. The CIS rules are applicable on all the payments that are done from the contractor’s side to the various subcontractors. As most subcontractors are unorganized and self-employed, CIS ensures regular contributions to the various tax and national insurance schemes from their side.
It is better that you know about the various technicalities involved in processing CIS payroll before taking a step further:
Who is a Contractor?
It is essential to know the proper definition of these terms as their legal meaning may differ from what we know.
In legal terms, a contractor is a private or public business entity that hires subcontractors for construction work and pays them in return. Examples of contractors are:
- Housing associations
- Property developers
- Government departments
- Building firms
- Construction companies
- Local authorities
- Small construction-centric businesses
A registered CIS contractor needs to fulfill any of the following requirements to be eligible:
- Hire and pay the subcontractors for construction projects
- Have a business that spends £1 million on construction projects in 3 years but does not necessarily do the construction work.
Who is a Subcontractor?
A subcontractor can be defined as a person or business that gets paid to work on a construction project for a contractor. The contractor may need HMRC’s verification before paying the subcontractor. The HMRC, upon verification, will let the subcontractor know if they can receive their payments without deduction or with a certain rate of deduction.
What Type of Work Comes Under CIS?
CIS is designed to cover the construction work related to temporary and permanent buildings, civil engineering projects, and government authorized projects in the UK and its territorial waters.
The types of work that comes under CIS are:
- Preparing the worksite by laying foundations and preparing access routes
- Building and related work
- Repairs, alterations, and decorations
- Installing heating, lighting, water, power, and ventilation
- Cleaning the site after the completion of construction work
What are the Exceptions for CIS?
If you are a subcontractor who is hired for any of the following jobs, then you do not need to register for the Construction Industry Scheme or CIS payroll.
- Carpet fitting
- Hiring scaffolding without labor
- Making construction materials
- Delivering construction materials
- Doing non-construction work on a construction site like a canteen or health center
How much Tax needs to be Paid Under CIS?
There are three tax deduction rate slabs that a contractor needs to follow while making payments to a subcontractor. The rate of tax applicable is relayed to the contractor by the HMRC department upon verification of the subcontractor.
These rates of tax deduction are:
- 0% for the subcontractors with ‘gross payment’ status
- 20% for subcontractors registered with HMRC
- 30% for subcontractors not registered with HMRC