What Happens if you are NOT CIS Registered?

Why does the CIS exist?

The CIS was introduced in the early 1970s in response to a significant loss of revenue in the construction industry. Irish Roadworking gangs came to the UK as self-employed workers, but many avoided paying income tax. They registered under fake names like Donald Duck or Mickey Mouse, and cash payments were made through lump sums by the gang masters. This led to a substantial amount of uncollected tax. To address this, the government implemented the Construction Industry Scheme, which requires construction firms and contractors to deduct tax from subcontractors and directly pay it to the revenue. Subcontractors then offset this deduction against their own tax liabilities. The purpose of the scheme is to collect taxation from the construction industry.

Contractors engaged in construction activities, including building, repairing, demolishing, road works, power lines, and installations of systems like heating, electrical, or air conditioning, are obligated to register for the CIS. They must also make deductions from payments to subcontractors. The scheme doesn’t apply to contractors’ employees, as their taxation is accounted for through PAYE.

What is the definition of ‘construction’ work?

The regulations say that the construction, alteration, repair, extension or demolition of any works forming or to-form part of the land, including walls, roadworks, power lines, electronic communication apparatus, aircraft runway stops, harbors etc – so virtually any construction operation you can think of. Also the installation of heating systems, electrical systems and air conditioning systems are all covered under the Construction Industry Scheme. Contractors are obligated to register within the Revenue if they perform these operations.

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What happens if a contractor is not CIS registered?

If a contractor is not registered for the scheme and undergoes a revenue inspection or has their accounts reviewed by their accountant, the revenue will treat all payments made to subcontractors as the net amount.

Within the CIS, there are three levels of deductions. Some subcontractors are paid gross with no deduction, while most registered subcontractors have a 20% deduction. However, if a subcontractor is not registered, they are subject to a 30% deduction. If the revenue inspects an unregistered contractor, they would calculate the tax liability based on the net amount paid. For example, if the contractor made £80,000 in payments, the revenue would expect £20,000 in tax.

The contractor would then face a significant charge for undeclared and unpaid tax, along with interest and potential penalties. This can be financially ruinous, especially if the contractor is not operating as a limited company, as they would personally be liable for the tax. Even if they are operating through a limited company, they could still be held liable for the tax if they were found to have been reckless in their application of tax laws.

How long can HMRC backdate CIS investigations?

HMRC can retroactively claim taxes for up to six years, leading to a substantial liability.

How does CIS affect self-employed subcontractors who haven’t registered for CIS?

If an individual subcontractor hasn’t registered for the CIS, and their contractor is operating correctly, the revenue will instruct the contractor to deduct 30% of the subcontractor’s earnings and pay it directly to the revenue. The subcontractor can only access this deducted tax money when they submit their annual tax return at the end of the tax year and offset it against their tax liabilities. Depending on their earnings level, this may not be an issue for some subcontractors. Most subcontractors who are subject to a 20% deduction can simply do a simple tax return at the end of the year, often resulting in a rebate of a few thousand pounds, which can cover expenses like a summer holiday.

How easy is it to register for the CIS?

Registering for the CIS is now done online, and the system is user-friendly thanks to HMRC’s efforts. You can seek guidance from the HMRC CIS helpline either through the web or over the phone. Registration is generally a straightforward process.

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Nick Pilgrim

M.D. | CIS Payroll Expert
01245 493832

Nick loves nothing more than chewing the fat over CIS payroll queries – actually that’s not strictly true; he likes playing golf and driving round Europe, but pick up the phone to him anyway!

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