For the purposes of this article, we will use the English terms contractor and subcontractor in Polish sentences. We will also use the Polish inflections of these words, which is grammatically incorrect. However, these terms have become so ingrained in the everyday language of Poles in the UK that using their translations has made the content of the article less understandable.

What is CIS and who does it apply to?

CIS is a tax scheme introduced by HMRC which requires the contractor in 'construction contracts’ to deduct tax from payments made to the subcontractor. The deductions made by the contractor are treated as an advance payment of the subcontractor’s income tax.

It is very important to note that these rules apply mainly* in situations where the contractor is working in the construction industry on a daily basis. If construction work is contracted out to a company outside the construction industry or to an individual, CIS does not apply.

The only exception to this rule are so-called „deemed contractors”. Sometimes companies or public bodies that are not in the construction sector regularly commission construction work on their premises. If their expenditure on such work over the previous 3 years averages more than £1 million, they are automatically deemed to be a contractor and must register for CIS. Common examples of such companies include property investment companies, shopping centres, large manufacturing companies, housing associations and public bodies.

Does CIS apply to companies outside the UK?

CIS also applies to foreign companies carrying out construction projects in the UK. The registration process for foreign companies is much more complicated than for UK companies, but the general rules (tax deductions) are the same.

CIS Registration

Registration for CIS should be completed before starting work with the first subcontractor. The registration requirement applies to both contractors and subcontractors. You can register yourself or ask your accountant for assistance.

Subcontractor Verification

Once you have registered as a contractor, you can start using the services of subcontractors. As subcontractors are also required to register, you must check with HMRC before making the first payment to each subcontractor that they have complied with their registration requirements.

As a result of this verification, HMRC will tell you which tax deduction rate to use:

• 20% for subcontractors registered for CIS
• 30% for subcontractors not registered for CIS
• 0% for subcontractors with „GROSS” payment status

How do you get GROSS payment status?

To register for gross payment status, which means you will receive your full income without tax deductions, you must

• Offer construction services and mainly operate your business through a bank account
• Have a turnover, excluding VAT and materials, of at least £30,000 over the last 12 months
• Comply with all tax regulations on a daily basis

The first two conditions are relatively straightforward. In terms of tax compliance, all directors, partners and shareholders of the company must have filed all tax returns and made timely tax payments for the 12 months prior to your application.

You can make some mistakes or late tax payments during this period. Here’s a list of the mistakes you’re allowed to make:

• Three late submissions of the monthly CIS subcontractor return
• Three late CIS/PAYE payments – up to 14 days late
• One late Self Assessment tax payment – up to 28 days
• One late Corporation Tax payment
• Late Self Assessment return

What type of work does CIS cover?

The CIS scheme covers all construction work carried out in the UK, including:

• Site preparation

• Alterations

• Dismantling

• Building

• Repairs

• Decorating

• Demolition

The scheme does not cover construction work carried out outside the UK.

(For the purposes of the CIS scheme, the UK includes the entire territory of the UK, including territorial waters up to the 12-mile limit.)

What types of businesses are covered by CIS?

The scheme covers all types of businesses involved in the construction industry, including

• Limited companies
• Partnerships
• Self-employed individuals
• Foreign companies

The above businesses can act as:

• Contractors

• Subcontractors

• Both contractors and subcontractors simultaneously

The difference between a contractor and a subcontractor

Who is the contractor?

A contractor pays subcontractors for construction work. Households or companies that do not work in the construction sector are not counted as contractors and are not covered by the scheme. For example, if you are extending your kitchen in your own home, you are not covered by the scheme. The scheme also does not apply if you run a retail or catering business and you commission a refurbishment of your office, warehouse or kitchen.

Who is the subcontractor?

A subcontractor is a company that carries out construction work for a contractor.

When you are both a contractor and a subcontractor:

Many companies contract out construction work to subcontractors, while at the same time receiving payments from other companies. In such a situation, the company is both a contractor and a subcontractor.

CLIENT (construction company – CONTRACTOR)

CONTRACTOR (CONTRACTOR and SUBCONTRACTOR)

SUBCONTRACTOR (SUBCONTRACTOR)

What are the responsibilities of contractors and subcontractors in the CIS sector?

• Register. The registration process can take up to 2 weeks, so make sure you do it before you engage your first subcontractors.
• Always check the accuracy of the CIS deduction statements you receive from the contractor. Check your company’s UTR number, name and address. Report any discrepancies to your contractor immediately.
• Verify all subcontractors before making payments to them. This means checking whether each subcontractor is registered with CIS.
• Remember to make the correct CIS deductions. The rates are 20% for registered subcontractors or 30% for unregistered ones. Subcontractors registered for GROSS payment status are not subject to deductions.
• Ensure you calculate the correct gross amount. Fees for items such as VAT, materials, and equipment are not included in the amount subject to CIS deductions.

How to make a CIS deduction?

You must deduct tax advances from each payment made to a subcontractor. When making a deduction from the subcontractor’s payment, start with the total gross amount of the invoice received from the subcontractor.

Net amount £500
Materials £250
Gross amount £750

2. To determine the amount subject to CIS deductions, subtract items not subject to CIS deductions from the gross amount:ą potraceniu CIS od kwoty brutto odejmij pozycje, które nie podlegają odliczeniom CIS:

• VAT
• Materials
• Equipment hired to complete the work

In our example:

Gross amount: £750
Materials: £250
Amount subject to CIS deduction £500

 3. Finally, subtract the CIS percentage rate (as per HMRC rules) from the amount subject to deduction.

Amount subject to CIS deduction: £500, so: £500 x 20% = £100

Amount payable to the subcontractor: £750 – £100 = £650

So, in our example, the net amount you must pay the subcontractor is £650.

Paying subcontractors

Generally (unless the contract states otherwise), you must pay the subcontractor and issue them a confirmation of the CIS tax deduction within 14 days of the end of the tax month. This confirmation is called a CIS Deduction Statement.

The tax month runs from the 6th to the 5th of each month (e.g., April 6 – May 5).

Paying HMRC

The tax advances deducted from the subcontractor must be submitted to HMRC within 14 days of the end of the tax month. In other words, by the 19th of each month. Failure to meet this deadline will result in interest and penalties. Payments are made via the HMRC website in the same way as PAYE and National Insurance payments.

Penalties

Failure to submit a CIS return on time can result in penalties of:

• £100 for 1 day to 2 months late
• £200 for 2 months to 6 months late
• £300 or 5% of the CIS deductions from the return, whichever is greater, for 6 months to 12 months late
• £300 or 5% of the CIS deductions from the return, whichever is greater, for more than 12 months late

For delays exceeding one year, you may receive an additional penalty of up to £3,000 or 100% of the CIS tax deducted, whichever is greater.

CIS-related documents

Below is a list of documents you must keep if participating in the CIS scheme:

• A contract signed with the subcontractor
• The gross amount of each payment invoiced by subcontractors, excluding VAT
• If you made deductions from the gross invoice amount, you must also keep records (e.g., material costs)
• Statements issued to subcontractors

How can Complex Accounting help you?

We provide comprehensive CIS tax support, from contractor/subcontractor registration (including for gross payments), verification of subcontractor registrations, preparation of monthly returns and submission of tax refund claims for overpaid tax.