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

How PAYE works

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

Cons of CIS

Pros of PAYE

Cons of PAYE

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.

Author

Rehan Javed

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