The Construction Industry Scheme (CIS) was introduced in 1971 to address tax evasion in the construction industry, particularly when paying subcontractors. While many industries have adopted more digitized tax systems, the construction sector still relies on CIS to ensure proper tax deductions on payments made by clients (contractors).
Even though recruitment agencies aren’t directly supplying staff to construction clients, CIS regulations still apply due to the way temporary and contract workers are engaged. This means new recruitment agencies must follow additional steps to ensure compliance before receiving payments from clients (contractors) and paying workers (subcontractors).
KEY CIS CONSIDERATIONS FOR RECRUITMENT AGENCIES
1. REGISTERING AS A “SUB-CONTRACTOR’’
A recruitment agency must register with HMRC under CIS as a “Subcontractor” because the placements they arrange may fall within the scope of CIS, meaning payments could be subject to deductions depending on the agency’s CIS status.
There are three CIS statuses:
o NOT REGISTERED: If an agency is not registered under CIS and works with a CIS-registered client where the candidate’s placement falls under CIS, the client can deduct 30% from the net amount on the invoice before making payment.
o UNDER DEDUCTION: If the agency is registered under CIS but hasn’t achieved “Gross Status,” the client can deduct 20% from the net invoice amount when a placement falls under CIS.
o GROSS STATUS: Once an agency has achieved £30,000 of CIS turnover per director or shareholder, it can apply for “Gross Status.” At this stage, no deductions will be made by the client when placements fall under CIS.
Any deductions made under the “Under Deduction” status can be offset against the following month’s PAYE payment when the agency submits their CIS return along with their PAYE RTI submission.
2. REGISTERING AS A “CONTRACTOR”
A recruitment agency also needs to register with HMRC as a “Contractor” under CIS. If the client considers the candidate’s placement to be under CIS, the agency may need to make deductions depending on the CIS status of the company through which the candidate is paid.
The agency will have to verify the CIS status via the Government Gateway using the UTR (Unique Taxpayer Reference) number of the candidate’s payment company, whether it’s self-employed, umbrella, or limited. Based on HMRC’s determination, the agency will either deduct 30%, 20%, or nothing from the candidate’s net payment.
These deductions must be submitted through the PAYE RTI submission and paid to HMRC along with the PAYE payment.
CHALLENGES FOR NEW START-UP AGENCIES
New recruitment agencies may face cash flow challenges if clients make deductions from payments until the agency reaches “Gross Status.” This could also result in reduced prepayment funding from invoice finance companies.
RECOMMENDATIONS FOR NEW START-UP AGENCIES DEALING WITH CIS PLACEMENTS:
• Register under CIS as early as possible to avoid the 30% deduction.
• Consider structuring the agency with one director who is also the shareholder, as this would require only £30,000 of turnover to reach “Gross Status.”
• Explore funding solutions with providers who already have CIS “Gross Status” to avoid deductions while building cash flow and turnover to qualify for “Gross Status” within a few weeks.
MAYACHI Ltd has extensive experience working with new start-up recruitment agencies that place contractors in the construction industry. We offer guidance on how CIS works and its impact on new agencies. Additionally, we can recommend trusted back-office and accounting firms to manage the CIS registration and return process, as well as suggest funding solutions tailored to the needs of CIS
