Construction Industry Scheme Explained

Have you heard of the Construction Industry Scheme or CIS? You might think this isn’t relevant to you as a property investor, but you may be surprised. In fact, property developers who are acting as contractors, i.e. when building, renovating or converting buildings may need to register as a contractor within the CIS. Read on to find out more about the CIS, how it can apply to your activities, how to pay tax under the CIS and other important information.

Table of Contents

What is the Construction Industry Scheme?
What Businesses Are Considered Contractors Under the CIS?
What is Considered Construction Work under the CIS?
Property Investors vs Property Developers
How Much Tax do you Pay in CIS?
How to Register for the CIS as a Contractor

What is the Construction Industry Scheme?

The Construction Industry Scheme, or CIS, is a tax deduction scheme for contractors and subcontractors within the construction industry in the UK. The CIS requires contractors e.g. building firms or construction companies to deduct taxes on behalf of their subcontractors. Subcontractors can also register themselves for CIS to save on their taxes. The CIS applies to workers who are self-employed and not employees of the contractor or company.

FAQ: Why don’t contractors just pay normal taxes on behalf of their employees?

Many workers in the construction industry are self-employed, as the nature of construction jobs means that work is varied and not every company needs every kind of worker at all times. Projects can be delayed and put on hold, so subcontractors will work for various companies to ensure a steady income. For example, plumbers may not be required until later in a construction project, so they will work for a different company with projects that are closer to completion and require plumbing work.

What Businesses Are Considered Contractors Under the CIS?

Some businesses outside of the construction industry could be considered contractors for the purposes of the CIS. If they spend more than £3 million in a 12-month period on construction activities, they will be required to register as a contractor under the CIS. This could include property investment companies. For example, if your property investment company acquires a former factory building and converts it into flats to let, this is considered construction activity and your company should register as a deemed contractor. A deemed contractor does not normally operate in the construction industry but can be classed as one as per CIS rules if their construction activities exceed the £3 million limit within 12 months.

What is Considered Construction Work under the CIS?

Construction work can cover almost anything that is done to a building or structure, including construction, repairs, alterations, extensions, renovations, decorating, demolitions, and more. So if you have undertaken any of these activities in your role as a property investor and spent £3 million or more within 12 months, you could be eligible to pay taxes under the CIS.

Property Investors vs Property Developers

There is of course a difference between property developers and property investors. Property developers are usually mainstream contractors, as opposed to deemed contractors, and will always have to register for CIS. However, this distinction does not matter if the above criteria apply and you may still have to register as a contractor under the CIS. If you have hired a contractor to carry out construction work for you, then they may be the ones who need to register and pay CIS taxes. Seeking advice from a financial adviser or accountant will help to clarify your position and tax obligations in this case.

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How Much Tax do you Pay in CIS?

Contractors who pay CIS should retain an amount for CIS taxes from their subcontractors’ gross pay, minus VAT, equipment costs (providing that equipment cannot be used on other jobs), fuel and materials. Subcontractors should be provided with a statement detailing all deductions every month. If the subcontractors are registered with CIS, then the rate of deduction is 20%. If they are not registered, the rate is 30%, so it is in the subcontractor’s best interest to be registered. Some subcontractors have ‘gross payment’ status, meaning that they pay their taxes and National Insurance contributions themselves at the end of the tax year. They still need to be registered with CIS to have gross payment status.

When you register with HMRC as a CIS contractor, they will provide more information on how to pay this tax and how it is calculated. If you do not engage in construction work as defined by CIS for up to 6 months, you can ask HMRC to make your scheme inactive – they will not send you any returns for that period.

How to Register for the CIS as a Contractor

To sign up for the CIS as a property developer or investor who is going to be undertaking construction work, you can do so on the ‘Register as an employer’ section on the HMRC website. If you have not already registered as an employer, use the lower section titled ‘Other types of business’ which includes using subcontractors under the CIS. Failure to register and pay CIS taxes can result in fines – check with HMRC to find out more about your CIS status and if you should be registered.

The Construction Industry Scheme (CIS) is a crucial tax framework that property developers and certain property investors must be aware of, particularly when engaging in construction work. Misunderstanding your obligations under CIS can lead to costly penalties and compliance issues. Whether you’re a mainstream or deemed contractor, registering with HMRC is a vital step to ensure you’re meeting your legal requirements.

To avoid any legal and financial issues, it’s important to stay informed about your tax status and seek professional advice tailored to your circumstances. Checking your obligations with HMRC or consulting a qualified accountant can provide clarity and help you navigate the CIS efficiently. By doing so, you can focus on your property projects with confidence, knowing your tax affairs are in order.

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