Construction Industry Scheme

The Construction Industry Scheme (CIS) is designed by HMRC to prevent tax avoidance from subcontractors by covering payroll taxes upfront.

That's why CIS applies to labour only, not materials. Contractors and subcontractors must register with HMRC. There are 3 types of CIS subcontractor status:

1. gross (subcontractors who are expected to stay up-to-date with PAYE payments, and are paid in full by contractors, with 0% deduction)

2. net (subcontractors whose payments are subject to tax deduction of 20%)

3. unregistered subcontractors (considered highest risk and subject a 30% tax deduction).

Full details of the scheme are available at gov.uk/what-is-the-construction-industry-scheme.

Contractors and subcontractors offset CIS and payroll taxes each month. A month runs from the 6th of one month to 5th of the next, in line with PAYE.

The amount to be paid to / refunded by HMRC each month is:

• PAYE / NI

• plus amounts deducted from payments to subcontractors

• less amounts deducted by contractors from your invoices.

You must:

• Register with HMRC as a contractor.

• Verify subcontractors before paying, using their National Insurance or Unique Taxpayer Reference and business name. HMRC will tell you what their CIS status is and provide a verification code.

• When paying a subcontractor, deduct 0% from labour if Gross. Deduct 20% from labour if Net. Otherwise, deduct 30% from labour.

• Complete a monthly CIS contractor return (even if Nil) by 19th.

• Send each Subcontractor a CIS deduction statement by 19th.

Xero can help you manage CIS verification, calculations and returns:

• Obtain subcontractor verification codes from HMRC and add them in Contacts > Suppliers.

• Use CIS labour account codes to ensure that CIS is calculated correctly on subcontractor invoices. Once paid, the CIS deduction will be automatically entered onto the contractor CIS return.

• Before 19th of each month, run and file a CIS return in Xero and send CIS Payment and Deduction Statements to every subcontractor.

For further details, see CIS for Xero.

You must register with HMRC. You will initially be given Net payment status, which means contractors will deduct 20% from labour amounts on your invoice. To successfully apply for Gross payment status you must pay tax and National Insurance on time (and meet specified minimum turnover levels).

You should

• split labour and materials on sales invoices;

• include the amount deducted by contractors in your Employer Payment Summary (EPS) to HMRC (in Xero, go to Payroll > RTI Filings, click EPS and enter CIS suffered then submit).

If you obtain gross payment status you do not need to do anything special in relation to CIS.

If you are self-employed you should include CIS deductions on your self-assessment tax return.