If you work in the construction space, you’ve more than likely tussled with Construction Industry Scheme (CIS) deductions at least once.
Designed as a scheme to deduct tax at source for construction work, CIS rules can be quite complicated to figure out depending on whether you’re a contractor, subcontractor, or operate in both capacities.
Whether you’re new to the construction space or have been in it a while, chances are you’ve dealt with questions like – what is CIS? What is CIS vs. PAYE? How do they differ? What if I owe taxes and can’t pay? How do I know if I’m due a tax refund?
In this piece, our CIS accountants will answer all of these and more.
What is CIS?
The Construction Industry Scheme or CIS, governs how contractors pay subcontractors for construction work. Managed by HMRC, it involves deducting tax from subcontractor payments and sending it directly to HMRC as advance tax payment, as a way to minimise tax evasion.
Both contractors and subcontractors must register with HMRC and obtain a Unique Taxpayer Reference (UTR). This is an important step for maximising take-home income, because registered subcontractors only get a 20% deduction from their pay, versus 30% for non-registered subcontractors.
How does CIS work?
If you’re a construction contractor, you’re required to register under CIS by providing your accurate business details. You’ll then have to deduct CIS tax at the appropriate rate from all your subcontractors and pay the same to HMRC on time every month. You’ll also need to keep full records of all CIS payments.
You’ll need to deduct 20% or 30%, depending on whether your subcontractors are registered or non-registered. HMRC offers a verification service through which you can verify the status of each subcontractor.
CIS covers most jobs within construction as well as allied tasks like bricklaying. However, certain material-heavy jobs as well as roles like surveyors or architects might be exempt from CIS — consult your accountant about it.
Failure to comply with CIS regulations could attract hefty penalties. If you need to rectify a mistake you should adjust the amount on your next CIS payment, or (for bigger errors) consult with HMRC directly for a solution. You can also get in touch with us for an initial discussion.
What is PAYE vs CIS? How do the two schemes work?
Contractors and subcontractors in the UK construction space need to follow both CIS and PAYE schemes to manage taxes on their earnings.
So let’s take a closer look at the key features of CIS vs PAYE.
How CIS works
- CIS focuses on the construction industry.
- Contractors deduct taxes from subcontractor payments at source, reducing the administrative burden on subcontractors.
- CIS involves variable tax rates. Registered subcontractors have 20% deducted, while unregistered ones have 30% deducted. Plus, those who qualify for gross payment status do not have any deductions.
- These deductions are considered as advance payments towards the subcontractor’s tax and National Insurance contribution.
How PAYE works
- The key difference to note in CIS vs PAYE is that PAYE involves income tax deductions across all industries.
- Under PAYE, income tax and National Insurance (NI) contributions are automatically withheld from wages and salaries by the employer, and then paid to HMRC.
- Employees under PAYE thus do not need to worry about their annual tax returns.
CIS vs PAYE: Pros and cons for subcontractors
Both CIS and PAYE have their positives and negatives to keep in mind when choosing between the two.
Pros of CIS
- Reduced administrative burden for subcontractors as the contractor is the one to calculate the deductions and pay HMRC
- Predictable deductions for subcontractors depending on which rate they qualify for, making for easy cash flow management
- Potentially higher take-home pay than under PAYE in case the subcontractor qualifies for gross payment status - although the tax and NI still has to be paid at the end of the year.
Cons of CIS
- Significantly higher tax rate (30%) for unregistered subcontractors, higher than most PAYE deductions
- Additional compliance burden of timely registration for both contractors and subcontractors, as well as monthly returns
Pros of PAYE
- Simple, convenient tax deduction option for employers as all income tax and national insurance contributions are taken care of by the employer
- No unexpected tax bills at the end of the year, which means not having to worry about questions like “What if I can’t pay my taxes?”
Cons of PAYE
- Less control over deductions for employees
- Potential for reduced take-home pay compared to subcontractors under gross payment status, depending on deductions and the relevant tax code
CIS vs PAYE: Which scheme to opt for?
When choosing between CIS vs PAYE, you’ll need to carefully consider your own role within the construction industry and what you prefer in terms of financial management.
For simplicity and clarity in managing your tax affairs, PAYE is definitely the better choice. However, if you can figure out the complexities of CIS, it offers clear benefits in terms of cash flow and tax management.
Ultimately, you’ll need to consult with your accountant about which of the two schemes will maximise your profitability depending on what your long-term financial goals are.
Final words
Both CIS and PAYE are important HMRC schemes that aim to create a streamlined tax payment experience while cutting down on evasions. While PAYE is a simple option for all industries, CIS has specific provisions for the construction industry.
So when it comes down to CIS vs PAYE, it depends entirely on what’s best for your goals, as determined by you and your accountant. Need help with navigating the CIS scene?
Thankfully, our accountants have extensive experience working with construction clients and would be happy to help you optimise your tax efficiency. Reach out to schedule your free consultation today.
