# How is CIS worked out?

## How is CIS Calculated?

The Construction Industry Scheme (CIS) is a system implemented by the UK’s HM Revenue & Customs (HMRC) to collect income tax from individuals engaged in construction work throughout the year (TaxScouts, 2023). Contractors are responsible for deducting tax on behalf of their workers (subcontractors) and remitting it directly to HMRC (Freshbooks, 2023). The amount of tax deducted depends on whether the subcontractor is registered with CIS. Registered subcontractors pay 20% tax, while non-registered subcontractors pay 30% (TaxScouts, 2023).

## Calculating CIS Tax

To calculate CIS tax, contractors need to determine the gross amount, qualifying materials, and CIS tax to deduct (Patterson Hall Accountants, 2023):

### Gross Amount

The gross amount is the total invoiced amount, excluding VAT. If the subcontractor is VAT registered, the contractor would exclude VAT from the total (Patterson Hall Accountants, 2023).

### Qualifying Materials

Qualifying materials are the costs incurred by the subcontractor for materials used in the construction work. For example, if a subcontractor purchases paint for a decorating job, they can recharge the cost of the paint as qualifying materials (Patterson Hall Accountants, 2023).

### CIS Tax to Deduct

The contractor deducts the qualifying materials from the gross amount to calculate the labor amount. Then, the contractor applies the CIS tax rate to the labor amount to determine the CIS tax to deduct. The CIS tax rate is typically 20% (Patterson Hall Accountants, 2023).

## Example Calculation

Consider an example where the subcontractor is VAT registered. If the contractor receives an invoice with a total invoiced amount of £700 (excluding VAT) and qualifying materials of £200 (excluding VAT), the CIS tax to deduct would be calculated as follows:

### Key Facts

1. Gross Amount: The gross amount is the total invoiced amount, excluding VAT. If the subcontractor is VAT registered, the contractor would exclude VAT from the total.
2. Qualifying Materials: These are the costs incurred by the subcontractor for materials used in the construction work. For example, if a subcontractor purchases paint for a decorating job, they can recharge the cost of the paint as qualifying materials.
3. CIS Tax to Deduct: The contractor deducts the qualifying materials from the gross amount to calculate the labor amount. Then, the contractor applies the CIS tax rate to the labor amount to determine the CIS tax to deduct. The CIS tax rate is typically 20%.
4. Calculation Example: Let’s consider an example where the subcontractor is VAT registered. If the contractor receives an invoice with a total invoiced amount of £700 (excluding VAT) and qualifying materials of £200 (excluding VAT), the CIS tax to deduct would be calculated as follows: £700 – £200 = £500 (labor amount), £500 x 20% = £100 (CIS tax to deduct).
5. VAT Registration: If the subcontractor is not VAT registered, they cannot reclaim the VAT on materials. In this case, the subcontractor would recharge the full cost of materials, including VAT, to the contractor.
• Gross amount: £700
• Qualifying materials: £200
• Labor amount: £700 – £200 = £500
• CIS tax to deduct: £500 x 20% = £100

## Conclusion

The CIS is a complex system with specific rules and regulations that contractors and subcontractors must adhere to. By understanding the key concepts of gross amount, qualifying materials, and CIS tax to deduct, contractors can accurately calculate and remit CIS tax, ensuring compliance with HMRC regulations.

## FAQs

### What is the gross amount for CIS?

The gross amount is the total invoiced amount, excluding VAT. If the subcontractor is VAT registered, the contractor would exclude VAT from the total.

### What are qualifying materials for CIS?

Qualifying materials are the costs incurred by the subcontractor for materials used in the construction work. For example, if a subcontractor purchases paint for a decorating job, they can recharge the cost of the paint as qualifying materials.

### How is CIS tax calculated?

CIS tax is calculated by deducting the qualifying materials from the gross amount to get the labor amount. The CIS tax rate (typically 20%) is then applied to the labor amount to determine the CIS tax to deduct.

### What is the CIS tax rate?

The CIS tax rate is typically 20%. However, subcontractors who are not registered with CIS pay a higher rate of 30%.

### How often is CIS tax deducted?

CIS tax is deducted from each payment made to a subcontractor.

### Who is responsible for deducting CIS tax?

Contractors are responsible for deducting CIS tax from payments made to subcontractors.

### What happens if I don’t deduct CIS tax?

Failure to deduct CIS tax can result in penalties from HMRC.

### How can I check if a subcontractor is registered with CIS?

You can check if a subcontractor is registered with CIS by using HMRC’s online verification service.