One of the largest industries in the UK economy, the construction industry, has been positioned for growth as the newly elected Labour Government has pledged a target to build 1.5 million homes over the next 5 years and invest in public infrastructure as part of their goals for stability and economic progression. Whilst the increased demand will create an abundance of opportunities, construction companies will be faced with a plethora of complexities that require strict processes to ensure compliance in payroll as they hire an estimated 251,000 additional workers needed by 2028.

The following blog will highlight essential guidelines in relation to payroll for the construction industry.  

What is CIS?

When it comes to payroll, the construction industry has some unique legislations that companies should be aware of. Let’s start by breaking down The Construction Industry Scheme better known as CIS. Introduced in the 1970s to reduce tax evasion, the scheme applies to contractors who carry out work in the industry but not as an employee, as a self-employed individual. Under the CIS scheme, contractors deduct money from subcontractors payments and pass them onto HMRC.

What work does CIS cover?

The scheme covers construction work to:

- A permanent or temporary building or structure

- Civil engineering work like roads and bridges

The following lists the type work eligible under CIS:

• Preparing the site - for example, laying foundations and providing access works
• Demolition and dismantling
• Building work
• Alterations, repairs and decorating
• Installing systems for heating, lighting, power, water and ventilation
• Cleaning the inside of buildings after construction work

Contractor Vs Subcontractor

Though it is possible to fall under both categories, each have distinct responsibilities.

A contractor is hired by a client to carry out a project, but they may not have the expertise to fully complete the work. This is when a contractor would hire a subcontractor to help. A subcontractor with a specialist skillset is hired by the contractor (not the client) to complete the work they responsible for.

An example of the contractor/subcontractor relationship –

Bailey, a decorator is contracted by a builder to carry outwork which falls under the CIS. Bailey then subcontracts out elements of the work to her painter friend John as he has more expertise. In this Case, Bailey must register as both a Contractor and subcontractor with HMRC.

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Registering

You should register for the construction industry scheme(CIS) if you work for a contractor and you’re one of the following:

- Sole trader

- Owner of a limited company

- A partner in a partnership or trust

To register for the scheme, you’ll need:

1. Your legal business name or trading name

2. The unique taxpayer reference (UTR) for your business

3. Your VAT registration number (if you’re VAT registered)

4. The date you started trading

In addition to the above, depending on circumstances, you may also need to provide:

- Your National Insurance number

- Company registration number

- Registering partner’s details – including UTR and NI number

- Joint Venture Agreement

The easiest way to apply for the scheme which will register you for ‘net payment status’ (payment under deduction) is online here using your HMRC gateway account details.

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Payment status

Under the scheme, a contractor must deduct 20% from a subcontractors payments and pass it on to HMRC. This is called ‘net payment status’ with the deductions counting as advance payments towards a subcontractors tax and national insurance bill.

If a subcontractor has not registered with HMRC, contractors must deduct 30% from payments instead.

A subcontractor may decide they do not want any deductions made in advance, in such cases, the subcontractor may apply for ‘gross payment status’ and pay all taxes due at the end of the year when submitting self-assessment or corporate tax return.

To qualify for gross payment status, a subcontractor must demonstrate:

- Tax and National Insurance has been paid on time in the past

- The business does construction work (or provides labour) in the UK

- The business has a bank account

As part of the application, HMRC will look at your turnover for the last 12 months ignoring VAT and costs of materials. Turnover must be atleast:

• £30,000 if you’re a sole trader
• £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
• £30,000 for each director of a company, or at least £100,000 for the whole company

At Folio, we are a collaborative team of knowledgeable professionals in Payroll, Tax and R&D compliance ready to partner with your company to transform and develop your business operations. If you’d like to learn more about our services, please reach out using the below form.