What is a CIS monthly return and how to file with HMRC?

The Construction Industry Scheme (CIS) is a series of regulations for contractors and sub-contractors working within the UK construction industry. CIS was introduced to minimise tax evasion.

CIS sets out how contractors in the construction industry must handle payments to subcontractors for construction work. Contractors must make deductions from their payments to subcontractors to pass onto HMRC and file CIS monthly returns.

In this blog we will answer the question ’What is a CIS Monthly Return and How to File with HMRC?’ But first let’s start with a bit more information about CIS.

What is CIS?

Under CIS, contractors must deduct money from a subcontractor’s payments and pass it to HMRC. The deductions are advance payments towards the subcontractor’s UK tax and National Insurance.

The Construction Industry Scheme was created to reduce the potential for tax avoidance in the construction sector.

The contractor must also complete a CIS monthly return, so that HMRC know who has been paid, how much, and what deductions were taken from them for tax.

Who needs to file a CIS monthly return?

If you are a contractor that pays sub contractors to undertake construction work on your behalf, you must register for CIS with HMRC and submit CIS monthly returns.

CIS covers a wide range of construction work, including site preparation, refurbishment, decorating, other alterations, building work, dismantling or demolition of buildings, installation of heating, lighting, power, water, and ventilation, and other building repairs.

If your business activity is construction based and you pay subcontractors for work, you’re classed by HMRC as a ‘mainstream’ contractor. This applies to:

• builders
• labour agencies
• gangmasters (or gang leaders)
• property developers

HMRC can also count you as a ‘deemed’ contractor if your business does not do construction work, but you have spent more than £3 million on construction in the 12 months since you made your first payment. This could apply to organisations such as:

• housing association or arm’s length management organisations (ALMOs)
• local authorities
• government departments

Registering for CIS

Contractors

Before you take on your first subcontractor, you must register for CIS with HMRC. You’ll need to set up as a new employer via HMRC (if you are not already set up). Once you’ve registered, you’ll receive your employer PAYE reference number.

Contractors have an obligation to decide if their workers are employed or self-employed, just assuming that CIS workers are genuinely self-employed and not checking, poses a risk to contractors from a tax perspective.

If HMRC was to find that a subcontractor’s contract and working conditions are aligned with employment (not self-employment), and you’ve allocated them the wrong employment status, then the contractor would be liable for missing income tax and national insurance and may face penalties.

Once registered and set up, you’ll be responsible for deducting money from subcontractors’ pay for income tax and National Insurance. To fulfil your HMRC responsibilities, you’ll need to file CIS monthly returns (even if the return is nil) and retain CIS records. Failure to fulfil these requirements and file a CIS return can result in a penalty.

CIS deductions and record keeping

Under CIS, you must keep records of all CIS transactions, invoices, and payments, as well as subcontractor statements. You are responsible for keeping accurate records that back up your CIS return including:

• the gross amount of each payment invoiced by subcontractors, excluding VAT
• any deductions you’ve made from subcontractor payments

If you made deductions, you must also keep records of the costs of materials the subcontractor invoiced you for, excluding VAT.

You will be required to keep these records for at least 3 years after the end of the tax year they relate to. HMRC can request to see your CIS records at any time.

You could be fined up to £3,000 if you cannot produce CIS records when asked by HMRC.

Filing monthly CIS returns

Paying subcontractors, taking tax deductions and filing CIS returns are crucial as a contractor, you need to make sure you hit deadlines and comply with HMRC rules. You will need to submit a CIS return each month to tell HMRC about the subcontractors that you work with. To back up these monthly returns, you will need to keep detailed financial records.

You must tell HMRC each month about payments you’ve made to subcontractors through your monthly return.

You can file returns by using:

• the HMRC CIS online service
• some commercial CIS software

On each return, you must declare that the subcontractors listed are not employees. Be warned, you could get a penalty of up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return.

If you made no payments

You do not have to file a return for the months when you made no payments to subcontractors, but you must notify HMRC:?

What do I need to register a company in the UK?

• that no return is due for these months
• if you start using subcontractors again after you’ve temporarily stopped using them
• if you want to make an inactivity request because you’ve temporarily stopped using subcontractors - this lasts for 6 months

You can use the CIS online service to notify HMRC. If you cannot use the CIS online service, you can tell HMRC by phone or post.

Using commercial CIS software for monthly returns

If you are using commercial CIS software, your return must not include any negative values. Instead, if any entries come to less than 0, you should put ‘0’ on the return. This is classed as a CIS nil return. HMRC may request details of any entries you replace in the future, so keep accurate records.

Monthly CIS return deadlines and penalties

HMRC’s requirements for filing a CIS monthly return are very specific. You must send your returns for the relevant tax month to HMRC by the 19th of every month following the last tax month (a tax month runs from the 5th of the month to the 6th of the following month). For example, if you’re making a return for the tax month of 6 January to 5 February, it must reach HMRC by 19 February.

Penalties for late returns

You’ll get a penalty if you miss the deadline for filing returns. HMRC’s penalty notice will issue the following penalties for late returns.

For even later returns than the timeframes above, HMRC may issue an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.

If you disagree with a penalty

You have the ability to appeal within 30 days of the date on the penalty notice and you do this:

• via HMRC’s online service - you can use the online service to also track the progress of your appeal)
• by writing to tell HMRC - when writing, quote your Unique Taxpayer Reference (UTR) and the payment reference shown on the notice

Correcting or changing CIS returns

If you wish to change or correction something on your monthly CIS return, you can utilise the HMRC CIS online service or call the HMRC CIS helpline if you require further help.

Making CIS payments to HMRC

Any deductions you’ve made under the scheme must be paid to HMRC.

HMRC will set up a CIS payment scheme for you when you register as a contractor.

If you already have employees, HMRC will change your existing PAYE Scheme to a PAYE/CIS scheme. You should make one payment each month or quarter to cover your PAYE tax, National Insurance and CIS deductions.

When and how to pay CIS payments

You will need to pay HMRC the tax deducted from your subcontractors every month by the 22nd (or the 19th if you’re paying by post).

You can pay deductions made for CIS to HMRC in the same way as PAYE and National Insurance payments.

Contractors have the option of paying HMRC the CIS deductions quarterly if their average monthly payments of PAYE, NIC, and CIS deductions total is below £1,500, but you must still file monthly CIS returns.

Summary

Filing a CIS monthly return and fulfilling your tax liabilities is a crucial part of being a contractor that hires sub contractors. Failure to comply with CIS monthly returns will result in a penalty notice from HMRC. Your monthly return should be an accurate record of tax deducted and should state clearly that the sub contractors working for you are self employed and are not employees.

If you require help and advice on anything related to CIS or completing a CIS monthly return, then contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Gary Zouvani
I am a qualified chartered management accountant with over 25 years’ experience working in industry and accountancy practise. Currently DNS group operations director I manage over 50 employees as well as head up our accountancy franchise proposition.