The UK’s Construction Industry Scheme (CIS) tax deduction is applicable to those working in the construction industry, working regularly with subcontractors. The scheme outlines that a tax deduction be added to each invoice of 20% or 30% on applicable items, depending on the registration status.
Contractors should generally be registered under CIS if they are working with subcontractors, and there can be a hefty penalty fee in the event that a self-employed worker in this industry fails to register.
When CIS applies
A typical situation in which CIS is applied in the invoicing and accounting side of a business is when a contractor is hired to complete a construction job.
John hires Thomas to complete a few repairs on his farm. Thomas is a bit busy and needs an extra pair of hands to get the work done so he hires Julie, who is self-employed, to help out with the job.
In this situation, Thomas would be paid by John, and Julie would be paid by Thomas. Because John is a private householder, Thomas is not subject to the deduction. However, Thomas should be registered under CIS as a contractor so that he can pay Julie with the 20% or 30% deduction (related to her status with HMRC).
If Thomas is not registered under CIS and continues through with the job and payment to Julie, he could face a steep penalty.
According to HMRC, depending on how late you are in registering under CIS, the potential fees could be as follows:
- £100 for 1 day late
- £200 for 2 months late
- £300 or 5% of the CIS deductions, whichever is higher, for 6 months late
- £300 or 5% of the CIS deductions, whichever is higher, for 12 months late
The maximum amount that can be charged as a penalty is £3,000 or 100% of the CIS deductions for returns later than 1 year.
When you fail to register: case story
You might have heard a horror story about what happens when contractor fails to register. One particular case is that of Brian Parkinson, a landscaper and gardener who failed to register for CIS for years while hiring subcontractors regularly.
The total CIS deductions that his jobs would have amounted to was £6,000. His fine? A jaw-dropping £31,500. Parkinson later challenged this fine, claiming that it was excessive and was granted a partial victory to reduce the amount. This was only due to the fact that the court found that Parkinson had not intentionally avoided CIS registration.
Managing your CIS deductions
As a subcontractor, you should be registered under CIS and include your deductions in your invoices to your employers. Not only will this ensure that your finances are above level, but will also indicate that the contractor you’re working with has registered as well.
Adding CIS to your invoices can be as simple as the click of a mouse with invoicing software like Debitoor, which makes it easy to enable CIS deductions in your account and apply them only to the appropriate lines in your invoices.