What is CIS Tax? How it affects Contractors and Subcontractors

The easiest way to explain what is CIS tax, is to explain the origins of why it was setup.

When contractors take on big building projects, they typically use subcontractors to assist with the project. This is an alternative to employing staff. The employment of staff would incur several additional taxes payable to HMRC, including PAYE and National Insurance.

Unfortunately taking on subcontractors could lead to HMRC suffering a loss of tax revenue. HMRC believed that it was too easy for subcontractors to do a bit of work, pocket the money and then not declare the income. Therefore CIS tax was setup by HMRC to reduce tax fraud.

To reduce tax fraud contractors must now report to HMRC, which subcontractors they have used. They also need to deduct a CIS tax and pay this to HMRC. So, instead of waiting for the subcontractor to declare the correct taxes at the end of the year, the contractor is paying the tax to HMRC up front.

It is similar to how employers run payroll. Employees only receive ‘net pay’ which is after the employer has paid over taxes to HMRC.

The CIS tax rate deducted by the contractor will either be 30%, 20% or 0%. Only the labour and non-qualifying materials are taxed.

We’ve stated previously that CIS is not an additional tax. It is simply a way of ensuring subcontractors can’t avoid paying their taxes.

This can be demonstrated in the following example:

Let us say we have an invoice from a subcontractor which totals £1,000. The CIS tax to deduct from this invoice has already been calculated as £150.

How does this affect the contractor, subcontractor and HMRC?

Contractors pay the same total as what is stated on the subcontractors invoice. In this example it was £1,000.

If you need to make a payment to HMRC, then whatever has been paid to them, is deducted from the subcontractors invoice total.

So in the example above the contractor would pay HMRC £150 and the subcontractor £850. As a result, the total cost to the contractor is still £1,000.

Try our CIS Tax Deduction Calculator.

When CIS tax is deductible from the invoice, the subcontractor will receive a lower payment from the contractor.

However the deduction is not lost. Instead it is offset against other taxes that the subcontractor may owe to HMRC.

So in the example above the subcontractor receives £850 but is owed £150 by HMRC. Typically the £150 is deducted from the taxes owed by the subcontractor when they complete their year-end accounts.

As the tax is deducted up front it could potentially cause cashflow issues. The up front tax can be reduced by registering as a subcontractor or applying for gross payment status.

Contractors pay CIS tax over to HMRC, but these taxes are then owed back to subcontractors.

Typically it is deducted from the taxes which the subcontractor owes.

So in the example above HMRC will receive £150 from the contractor. However when the subcontractor pays their year end taxes they won’t pay over the full amount owed. They will deduct any CIS tax they have suffered so in this case they’d deduct £150 from their tax liability.

HMRC have received £150 up front from the contractor, but will then receive £150 less from the subcontractor. As a result, the tax effect is neutral.

CIS applies to the majority of construction work on buildings, structures, roads and bridges.

There are however a few CIS exempt activities. We go through what is and isn’t covered below.

Construction work for the purposes of CIS includes the following:

– Site preparation, e.g laying foundations
– Demolition
– Building work
– Alterations, repairs and decorating
– Installing systems for heating, lighting, power, water and ventilation
– Cleaning the inside of buildings at the end of the construction work

The following list are work types which are specifically exempt from CIS:

– Surveying and architecture
– Scaffolding hire (with no labour)
– Carpet fitting
– Making materials for use in construction
– Delivery of materials
– Work on construction sites which is obviously not construction for example running a canteen

Note: Where exempt work is being carried out in conjunction with work which is covered by CIS, then often the exemption is lost. All of the work would need to be taxed under CIS.

For example, an architect who is also involved with the actual building work would invoice all of the work under CIS. There would be no exemption.

A private household which requests work to be done on their own home is not covered by CIS. Private householders aren’t contractors. If there is no contractor then the work is not covered by CIS.

Note that if an individual then subcontracts out some of this work, then that would potentially fall under CIS. The key is who is the contract with? If it is directly with the homeowner then it isn’t covered by CIS. Anyone else and it could be CIS depending on the work involved.

For more information on this see our blog register as a contractor, which explains who is a contractor.

There are many work types which could be covered by CIS. Below we go through some of the more popular construction work types and the CIS treatment.

Air-conditioning systems: Installation of air-conditioning systems are covered by CIS.

Architects: This is specifically excluded from CIS.

Burglar alarms: Installation of security systems such as burglar alarms and CCTV are excluded from CIS.

Carpet fitting: The fitting of carpets and other floor types such as vinyl is excluded from CIS if the work is carried out in isolation.

Painting or decorating: The painting or decorating of any building or structure both inside and out is covered by CIS.

Building extensions: This work is covered by CIS.

Bathroom or kitchen fitting: This is classified as a finishing operation which would bring a construction project to completion and is therefore covered by CIS. Please note that this only applies where a contractor requests the work to be carried out. Mr Smith purchasing a new kitchen for his home from his local kitchen retailer is not covered by CIS.

Plant hire: If the hired plant comes with an operator then it is covered by CIS. If the payment is purely for the hire of plant only without an operator then it is not covered by CIS.

Scaffolding: Erecting scaffolding is covered by CIS.

Solar panels: The install of solar panels is covered by CIS. However as with bathroom and kitchen fitting if the contract is directly with the private householder it is not covered by CIS.

For more specific information on particular construction work type please see the following HMRC link. https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-reform/cisr14330