Everything you need to know about the Construction Industry Scheme (CIS)

In recent years, the number of people being paid under the Construction Industry Scheme (CIS) has risen. An estimated 1,206,000 construction workers used the scheme during the 2022/23 tax year.

And with the UK government setting plans to build 1.5 million homes in England by 2029, the popularity of the scheme could spike once again. This ambitious initiative is set to require an estimated additional 251,500 skilled construction workers.

If you hire self-employed subcontractors as part of your work, you could miss out on important tax benefits, and even end up facing penalties for failing to register with the Construction Industry Scheme.

Continue reading to learn more about HMRC’s Construction Industry Scheme. We’ll discuss what CIS is, how it works, the benefits, and what kind of work it covers. Learn more with BambooHR.

What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) is an HMRC initiative created for self-employed subcontractors who work for contractors in the construction industry, but not as employees. The scheme, which was introduced in 1971, rules that contractors should withhold tax from subcontractor’s pay at a rate of either 20% if they’re registered with the CIS, or 30% if they aren’t. They will then provide these funds to HMRC as a form of advance payment towards the subcontractor’s tax and National Insurance.

The initiative works differently from the way tax is managed for self-employed workers who aren’t part of the construction industry. Those workers typically receive gross payments without any tax being deducted beforehand.

What are the benefits of CIS for employers?

CIS can bring a number of benefits to employers in the construction industry. These include:

Hiring top-quality talent

You can verify any subcontractor you want to use with HMRC by checking that they’re registered with the Construction Industry Scheme. This can help to reduce your risk of working with unreliable, non-compliant contractors.

Helping prevent tax avoidance

Through CIS, you can ensure that the subcontractors you’re associated with pay their income tax and do so on time. The scheme helps to improve tax compliance and streamline tax collection, creating a more transparent system, and helping employers avoid penalties.

Saving on National Insurance Contributions (NICs)

When subcontractors are registered under CIS, employers aren’t required to pay National Insurance Contributions (NICs) for them, so effective cost savings can be made, compared to employing staff directly.

Enabling a more flexible workforce

CIS allows businesses to use subcontractors more easily, making their workforce increasingly flexible while avoiding the commitments and official processing that comes with full employment. Employers can then scale their team up or down depending on the needs of the project.

Who is covered by CIS?

According to the UK government website, the Construction Industry Scheme (CIS) covers most construction work being completed on buildings, such as site preparation, refurbishment and decorating.

The types of construction workers it covers include:

Mainstream contractors

These are contractors that run a construction business and pay subcontractors to carry out work. This includes:

• Builders
• Gangmasters
• Labour agencies
• Property developers

Deemed contractors

These contractors run businesses that don’t directly carry out construction work, but have spent over £3 million on construction in the 12 months since their first payment. This typically applies to:

• Local authorities
• Government departments
• Housing associations
• Arm’s length management organisations (ALMOs)

If you call into any of these categories, it’s important that you register as a contractor with CIS. Failing to do so could result in penalties.

What type of work is covered by CIS?

Here’s a breakdown of the type of work CIS covers:

Construction work to complete:

• A temporary building or structure
• A permanent building or structure
• Civil engineering work (e.g. roads and bridges)

Construction work can include:

• Preparing the site, such as laying foundations
• Demolition
• Dismantling
• Building work
• Alterations
• Repairs
• Decorating
• Installing heating, lighting, power, water and ventilation systems
• Cleaning building interiors after construction work has been completed

Exceptions to CIS

There are some forms of construction work that you don’t have to register with CIS for. Such as:

• Architecture
• Surveying
• Carpet fitting
• Scaffolding hire (with no labour)
• The manufacture of materials used in construction
• Delivering materials
• Work on construction sites that clearly doesn’t classify as construction—like running a food canteen

Rules for CIS contractors

It’s important that employers understand and abide by the rules and regulations of CIS to ensure they remain compliant and avoid any penalties.

The rules of CIS include:

1. You must register with the Construction Industry Scheme prior to taking on your first subcontractor.
2. Check if you should employ the person instead of hiring them as a subcontractor. It’s important to know the difference, as you could receive a penalty for getting this wrong.
3. Check with HM Revenue and Customs (HMRC) to verify that your subcontractors are registered with CIS. Do this with the free HMRC CIS online service, or by using commercial CIS software.
4. Make deductions from subcontractor payments and pay the funds to HMRC. They will tell you how much you need to deduct from a subcontractor’s payments once you’ve verified them.
5. File monthly returns and keep full CIS records. This includes each gross payment invoiced by subcontractors, excluding VAT and any deductions you’ve made.
6. Inform HMRC of any changes to your business.

CIS FAQs

If you have further questions about the Construction Industry Scheme and how it works, this FAQ section should provide you with all the information you need.

How do I verify subcontractors?

You can verify any subcontractor you want to hire using HMRC’s free CIS online service or a commercial CIS software. If the number of subcontractors you need to verify exceeds 50, you’ll need to use commercial CIS software. From there, you’ll be able to find out whether the subcontractor is registered for the scheme, and you can confirm the rate of deduction for their payments.

Is CIS available in Scotland and Wales?

Yes, the Construction Industry Scheme is available in both Scotland and Wales. The scheme is UK-wide and managed by HMRC, so it applies to construction work completed across England, Scotland, Wales and Northern Ireland. However, Scotland sets its own tax rates – known as Scottish income tax – and Wales introduced the partial devolution of income tax in 2019/20, the Welsh rate of income tax.

Is the tax withholding always 20% for CIS?

No, the tax withholding for CIS is not always 20%. Although 20% is the standard deduction rate for registered subcontractors, contractors are required to withhold 30% for unregistered subcontractors. Please note, if invoices include direct expenses for things like materials or tool hire, tax should not be withheld from these figures.