With a number of similarities to PAYE, the Construction Industry Scheme (CIS) is a mandatory withholding tax where either 20% or 30% is deducted from a self-employed construction subcontractor's payments and paid directly to HM Revenue and Customs on their behalf.
The deductions serve as advance payments towards the subcontractor’s annual income tax, spreading some of their tax liabilities over the financial year instead of accruing an end-of-year tax burden. Under CIS most subcontractors will have no income tax to pay at the end of the year, and many will get a tax rebate after claiming expenses back against the tax they have already paid.
Contractors who pay subcontractors for any and all construction work must register for the Construction Industry Scheme. Subcontractors don’t have to register for the Scheme, but deductions are taken from their payments at the higher 30% rate if they do not register.
The primary reason the government created the Construction Industry Scheme was to reduce tax avoidance and tax evasion, which have been particularly prevalent in the construction industry in the UK. The Scheme has the added benefit of helping subcontractors spread their income tax burden across the year in line with their income.
However, the CIS is not without its detractors, with some critics suggesting the Scheme is being used by some contractors to remove employees from the payroll by reclassifying them as self-employed subcontractors, thereby depriving them of the legal rights enjoyed by salaried staff.
Under the Construction Industry Scheme most structural or decorative work carried out on a permanent or temporary building or other physical structure is classed as construction work. In addition to typical construction work such as demolition, bricklaying, carpentry, plastering or joinery, work that may not traditionally be seen as construction, such as painting and decorating, are also classed as construction work under CIS.
Professional services (for example, architecture or design) and support services (eg catering or cleaning) are not usually classed as construction work under CIS. Scaffolding hire, delivering materials to a construction site and fitting carpets in a building are also not covered by CIS.
Any business or individual who pays subcontractors for construction work is classed as a contractor under CIS and must register as a contractor with HMRC. Contractors must register before any construction work begins.
A subcontractor is anyone who does construction work for a contractor. While subcontractors do not have to register with HMRC, doing so will reduce their mandatory tax deductions from 30% to 20%.