Understanding the Construction Industry Scheme (CIS) tax

If you are a contractor in the construction industry it is essential that you deduct the right amount of Construction Industry Scheme (CIS) tax from payments you make to subcontractors.

A common misunderstanding about the CIS is that deductions of CIS tax only have to be made from labour costs. This is not the case, but it may work out like that in practice.

HMRC’s instructions are clear, the contractor must deduct the following cost items as listed on the subcontractor’s invoice before applying the appropriate rate of CIS tax (20% or 30%) to the net amount:

  • VAT charged;
  • CITB levy paid;
  • materials;
  • consumable stores;
  • fuel used – except for travelling;
  • plant hire; and
  • manufacturing or prefabricating materials.

If the contractor does not deduct the right amount of CIS tax they remain liable for that tax to HMRC, unless the contractor can persuade HMRC to demand the CIS tax directly from the subcontractor.

In a recent case the judge was very critical of the company directors and internal accountant for not taking the trouble to read the CIS regulations and taking care to apply them. This is a bit harsh, as the regulations are not easy to understand. However, you should at least make sure that anyone who operates the CIS within your company reads the guidance concerning CIS on the HMRC website. If you are unsure about any aspect of the CIS ask us for clarification.