Construction payroll in the United Kingdom is subject to certain rules and conditions imposed by HM Revenue and Customs (HMRC) through the Construction Industry Scheme (CIS).
You must register with CIS and follow CIS payroll if you are hiring subcontractors to work on your construction projects.
CIS payroll can be done in-house, but many companies find it easier and more efficient to hire a CIS payroll company.
What happens with CIS payroll?
Basically, CIS payroll is a payment processing system specifically for subcontractors. It requires you to make deductions from the monthly payments that you make to your subcontractors. You must send these deductions to the HMRC.
There are also various reports that you must make and submit to HMRC and even your subcontractors to show that you properly complied with the scheme. This is one reason why many companies opt to outsource this to CIS payroll companies.
Who need to register with CIS?
If you are involved in the construction industry and you hire subcontractors, you need to register with CIS.
If your main business isn’t construction but you spend heavily on construction projects, CIS might apply to you as well. For example, if you are a store chain that is expanding and having several store locations built a year, you might need to be part of CIS.
Rule of thumb, if you are spending over £1 million on construction services over a three year period, you can be considered a contractor and will need to register with CIS.
Subcontractors, on the other hand, don’t necessarily have to be registered with CIS. Contractors can hire unregistered subcontractors, but they will still need to make deductions from these subcontractor to send to HMRC.
So, all subcontractors are subject to CIS payroll, whether they be registered or not.
What does CIS payroll require?
Under the CIS payroll process, contractors make monthly deductions from their subcontractors which are then sent to the HMRC.
The HMRC uses these payments to enroll subcontractors in National Insurance. It also serves as partial payment of the subcontractor’s taxes.
When a contractor hires a subcontractor, they need to verify if they are registered on not with HMRC. HMRC will then inform the contractor of the deduction rate that they should impose on the subcontractor.
So, registered subcontractors are subject to a 20% deduction rate, while unregistered subcontractors have a 30% deduction rate.
Contractors are also responsible for keeping both HMRC and their subcontractors advised about how they are complying with CIS. This means that they need to file monthly returns with HMRC and give their subcontractors a payment and deduction statement each tax month.
Contractors who don’t comply with CIS policies will be subject to penalties. This is one reason why many find working with a CIS payroll company is a more effective business strategy.