When compared to other sectors, subcontractors pay tax differently. This peculiarity is because of the construction Industry Scheme (CIS). It enables them to pay their tax in advance and sometimes they end up paying more than they ought to. CIS allows construction workers to collect what they are owed.
Let us explain how this system works and how you can benefit from it.
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is where a construction contractor deducts, at source, a portion of the money due to their subcontractor. Whatever amount is deducted will be passed directly to HMRC and this counts towards the tax and the National Insurance of a subcontractor. This effectively pays the tax element in advance.
The deducted amount depends on whether or not a subcontractor is registered under the CIS system. Usually, unregistered subcontractors receive a 30% deduction, while registered subcontractors receive a 10% or 20% deduction. This is why the deducted amount at source always ends up being too much by the end of the financial year. It hasn’t been factored into the personal allowance that every UK taxpayer is entitled to.
For clarity, before 2015, most UK citizens received up to £10,000 without including tax, this number rose to £10,600 in the 2015-16 tax year, £10,800 a year later, and by 2017-18 it was £11,000 following some budget proposals. Due to the overpayment, several subcontractors in the construction industry will be owed a tax refund.
People Eligible for CIS
There are two categories you have to fall under to be eligible for CIS. They are:
– A subcontractor that supplies construction work to buildings, such as site preparation, refurbishment, labouring, and decorating.
– When you spend £1 million a year on building within three years you are considered a contractor for CIS purposes.
If you fall within both categories, you must follow the rules set for a contractor as well as a subcontractor.
Some of the jobs exempted from the CIS scheme are scaffolding hire on a construction site without labour, carpet fitting, architecture and surveying, and material supply. Other non-construction works such as operating a site facility are also exempted.
What Happens to Businesses that are not in the UK?
Even if your business is outside the UK but you are subcontracting in the UK, you are still considered a subcontractor in the country and must follow the same rules as the local subcontractors/contractors.
The only difference is when Double Taxation applies, especially if you are treated as a non-resident worker in the UK for tax purposes. The treaties that apply to you will establish whether or not you pay tax in the UK or where you’re domiciled.
Registration for CIS
Subcontractors are not obligated to register for the CIS system but they could suffer a higher deduction. So we advise them to always register.
We will need to collect your business’ unique taxpayer reference number, your National Insurance Number, VAT registration number if you are VAT registered, and your legal business name or trading name, that is if they are different to help you register. Once registered with CIS one of the immediate benefits will be that you’ll then have tax deductions made at the 20% rate rather than at 30%.
Registration also applies to sole traders and overseas-based subcontractors that carry out construction work in the UK.
Limited companies and partnerships can also apply for CIS. We will help register you as a sole trader, and then HMRC will register the partnership separately. We can help with the process to make it easier for you.
There are instances where the gross payment status causes a subcontractor to get paid in full without deductions. You can apply for the same status when you register for CIS, provided you qualify and meet all of HMRC’s requirements. The requirements can be your turnover in the past 12 months and whether or not your business is running through a bank account.
If you’re both a subcontractor and a contractor, you need to register to CIS for both roles.
How to Offset Expenses Against Your Tax
Your tax refund can increase if you offset certain expenses against your subcontractor income. This means any tax outstanding will be reduced, resulting in a higher tax claim.
Some of the allowable expenses include vehicle expenses, office costs, plant and equipment, clothing, insurance, and accounting fees. Most of the work-related expenses that are not declared before tax deduction can be offset. We will help with that and keeping good records/ receipts for all allowable expenses.
Records Needed to Claim a CIS Tax Refund
It is important that you keep proof of all your expenses and all amounts claimed back against your quarterly PAYE or monthly bill. We can help in keeping your records or use the form CIS132 found in GOV.UK.
Make sure you keep a copy of your bank statement or download a copy of an electronic bank statement if you use an online banking account.
You should also consider paying expenses and tools using a debit or credit card so that you will have a record of every transaction even if you lose the receipts.
How to Claim a CIS Tax Refund
For sole traders and partnerships, we can help to fill out and submit the required Self Assessment tax return. We will include details of the amounts you have invoiced as a subcontractor and a note of any allowable expenses which can be used to offset your income, thereby lowering your tax and National Insurance bill.
For Limited companies which have a gross payment status, we can help to fill out and submit the required Corporation Tax Return. We also assist with payroll which is very important in the case of CIS deductions for Limited companies.
We ensure accurate and on-time submissions of your ‘EPS’ and ‘FPS’ to HMRC. Finally, we fill out and submit your CIS132 forms when and where applicable. Combined, these will allow HMRC to agree on the correct tax and National Insurance with any outstanding balance due.
If you’re a contractor or a subcontractor in need of help with your CIS, we would love to hear from you. Don’t hesitate to contact Reed & Co accountancy today!