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Construction Industry Scheme (CIS)

Here is what you need to know about the Construction Industry Scheme (CIS) and how we can help ensure your business remains compliant with the scheme.
What is CIS?

If you are a contractor in the construction industry, it is crucial to be aware of your obligations under the CIS to avoid non-compliance penalties imposed by HMRC and (in the case of sub-contractors) ensure the correct deductions are made.

What is CIS? 

CIS is a tax deduction scheme first introduced in 1971 to regulate and streamline tax collection within the construction industry. Under CIS, contractors are required to deduct a percentage from payments made to subcontractors to cover their tax and National Insurance Contributions liabilities.  

Subcontractors registered under the scheme will see 20% of their payments withheld for tax purposes. This increases to 30% for unregistered subcontractors.  

Contractors are then responsible for paying these deductions to HMRC each month alongside a monthly CIS return, which details the payments and deductions made.   

Speak to our experts

Barbara Bento

+44 (0)20 3972 6606
bentob@buzzacott.co.uk
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Phil Westerman

+44 (0)20 7556 1299
westermanp@buzzacott.co.uk

Liam McKeevor

+44 (0)20 7556 1244
mckeevorl@buzzacott.co.uk
LinkedIn

If you are a contractor in the construction industry, it is crucial to be aware of your obligations under the CIS to avoid non-compliance penalties imposed by HMRC and (in the case of sub-contractors) ensure the correct deductions are made.

What is CIS? 

CIS is a tax deduction scheme first introduced in 1971 to regulate and streamline tax collection within the construction industry. Under CIS, contractors are required to deduct a percentage from payments made to subcontractors to cover their tax and National Insurance Contributions liabilities.  

Subcontractors registered under the scheme will see 20% of their payments withheld for tax purposes. This increases to 30% for unregistered subcontractors.  

Contractors are then responsible for paying these deductions to HMRC each month alongside a monthly CIS return, which details the payments and deductions made.   

Who does CIS apply to?

Who does CIS apply to? 

CIS applies to almost all businesses operating in the construction industry, including building construction work, site preparation, decorating, repairs and refurbishment, staffing agencies that supply labourers and more. CIS can also apply to non-construction business in certain situations, 

The requirements of CIS differ depending on whether a business is a contractor or subcontractor, and some businesses may be considered both at the same time. The criteria for CIS can be complicated to navigate for contractors and subcontractors alike, so it is important that businesses are aware of the rules and seek specialist advice if they are unsure whether they need to register with the scheme.

Why is HMRC investigating?

Why is HMRC investigating? 

HMRC has launched a new campaign sending 'nudge letters' to encourage companies to review and correct any errors in their CIS declarations. Whilst the campaign has been introduced to initially target insurers, HMRC’s efforts may extend to other CIS-registered companies suspected of underreporting CIS deductions.  

HMRC’s increased activity and intensified scrutiny of businesses operating in the construction industry highlights the importance of ongoing compliance with CIS rules. Businesses should proactively review their processes and seek advice from a specialist adviser if they need help navigating the CIS rules and requirements. 

What are the common mistakes?

What are the common mistakes? 

Maintaining compliance with the CIS regime can be challenging for businesses due to its strict regulations. Here are some common mistakes that businesses should avoid: 

  • Failure to register for CIS: For contractors working within the construction industry, it is compulsory to register for CIS. As a contractor, failure to register for CIS can lead to significant penalties, which are explained below in more detail. Subcontractors are not subject to the same requirement to register for CIS. However, registered subcontractors are subject to lower deductions from their gross pay, so it is recommended that subcontractors also register for CIS. 
  • Incorrect deductions: It is essential that contractors accurately verify subcontractors’ CIS payment status to ensure the correct amount of tax is deducted and reported to HMRC. Failure to properly verify subcontractors can lead to incorrect deductions and ultimately may result in a HMRC investigation and penalties. 
  • Incorrect interpretation of the rules: The CIS rules are detailed and contractors can be exposed where they have incorrectly applied the rules leading to under deductions.  Examples include: situations where a mixture of construction and non-construction services are provided under a single contract and where assets are leased. 
  • Late submission of CIS monthly returns and/or CIS payments: Monthly CIS returns must be submitted to HMRC by the 19th of each month, and late submissions can lead to automatic penalties. 
  • Poor record keeping: Failure to keep accurate records of subcontractors’ costs and deductions may cause complications when negotiating with HMRC during an investigation. It is important that contractors maintain meticulous records to ensure they can support their CIS deductions and monthly submissions should HMRC challenge these.
Penalties

Penalties 

As noted above, failure to comply with the CIS regime can lead to significant financial penalties. These can include: 

Late-filing penalties: If contractors do not submit their monthly CIS returns on time, they will be subject to an automatic penalty starting at £100 and increasing incrementally until the return is submitted to HMRC.  

Penalties for incorrect deductions: Failure to deduct the correct percentage from subcontractors’ gross pay will result in arrears of underpaid deductions for contractors, along with late-payment interest and penalties. 

Removal of Gross Payment Status (GPS): GPS allows certain subcontractors to receive payment in full, without any deductions being made by contractors. Where HMRC discovers non-compliance with the CIS regime, a subcontractor’s GPS can be removed. As a result, the subcontractor’s payment status for deductions will increase to the standard rate of 20%. This, in turn, can create significant cash flow issues for businesses whose GPS is removed. 

Criminal prosecution: In the most serious cases, HMRC may pursue a criminal investigation. This could lead to substantial penalties or even criminal prosecution and imprisonment. In cases where a contractor has deliberately understated or withheld CIS payments, it is possible to make a voluntary disclosure to HMRC using the Contractual Disclosure Facility (CDF) which provides immunity from prosecution provided a full disclosure is presented to HMRC. Similarly, if HMRC suspects a contractor has engaged in such behaviour, the contractor may be invited to make a disclosure through the CDF.

How can we help?
How can we help? 

CIS rules and requirements can be complex and difficult for businesses to navigate without assistance from a specialist adviser, and CIS investigations can be costly and damaging to the reputation of the business. At Buzzacott, our experts can support your business with navigating the CIS rules. We can support with matter ranging from: 

  • Carrying out a ‘health check’ of your CIS processes, to ensure compliance with CIS and minimise the risk of a future HMRC investigation; 
  • Advising on ad-hoc queries as to the application of the rules in specific circumstances; and 
  • Reviewing and advise on the requirements and whether your business falls with the regime. 

If HMRC has already opened a CIS investigation into your business, our award-winning Tax Investigations and Dispute Resolution team can negotiate with HMRC to minimise your exposure to tax and penalties and ultimately help bring the investigation to a swift conclusion.

Please note: Ongoing HMRC strikes may result in delays to CIS services.

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