Learn more about CIS tax responsibilities for contractors and how to stay on the right side of HMRC when working in the building trade.
 

The Construction Industry Scheme explained

The Construction Industry Scheme was introduced to standardise the way in which contractors pay their subcontractors, and reduce the risk of tax evasion in the construction industry.

Under CIS rules, contractors are required to deduct tax from the payments they make to subcontractors they work with. As a contractor you’ll be responsible for reporting these deductions using a CIS Return, and paying them on to HMRC.
 

What does this mean for contractors?

For contractors, all this really means is a bit more admin. CIS returns have a more substantial impact on subcontractors because the tax rate at which CIS deductions are calculated is based on whether or not the subcontractor is CIS registered.

The calculation also doesn’t factor in the tax-free personal allowance, so the tax that’s deducted might not be completely accurate (but this will be corrected once the subcontractor submits their own tax return).
 

Who does CIS apply to?

The scheme applies specifically to contractors and subcontractors in the construction industry. This primarily includes builders, property developers, labour agencies and gangmasters.

There may also be times when the definition includes housing associations, government departments, arm’s length management organisations (ALMOs) and local authorities.

Do I need to register as a CIS contractor?

As a contractor, you must register for the Construction Industry Scheme if:

• You pay subcontractors to perform construction work for you
• You’ve spent more than £3 million on construction in the 12 months following your first subcontractor payment, even if your business doesn’t fall under the category of construction

CIS covers building works such as site preparation and decoration but not things like scaffolding hire, carpeting, delivery of materials, surveying, or the management of site facilities (such as on-site food provision)
 

How do I register as a CIS contractor?

CIS registration isn’t an automatic process, and contractors are responsible for registering themselves at the appropriate time. To sign up as a contractor you’ll need to follow the same process as if you were registering for PAYE as an employer.

Make sure you register for CIS as a contractor before making your first payment to a subcontractor!

Requirements for contractors under CIS

There are certain regulations you need to follow as a contractor working under the Construction Industry Scheme:

• Check whether or not any subcontractors you hire are registered for CIS. You can do this on the HMRC website using their UTR number
• Confirm that you can actually recruit somebody as a subcontractor. In some cases, a person might need to be contracted as an employee. This kind of mistake is easy to make without thorough due diligence but can lead to costly fines from HMRC.
• Submit monthly CIS returns and maintain up-to-date CIS records for HMRC, even if you don’t intend to pay subcontractors all the time
• Keep a record of the gross amount of any payments you make to subcontractors (excluding VAT) and the sum of CIS tax deductions from these payments

You will also need to make sure that the CIS records you keep are up to date and accessible to HMRC for a minimum of three years.
 

Do CIS contractors still need to submit tax returns for their business?

Yes, you’ll still need to submit tax returns for your business, even if you need to register for CIS to tell HMRC about your subcontractors. Your tax return tells HMRC:

• How much money the business earned in a tax year
• How you earned it (i.e. through your contractor business and any other form of income)
• The allowable expenses you want to claim tax relief on (e.g. equipment, tools, work-related travel costs, etc.)
• Any tax you have already paid (to prevent you paying double tax)

Don’t forget to consider IR35

If you’re a contractor or setting up a contracting business, you’ve probably already heard of IR35. It’s an initiative designed to clamp down on contractors who operate through their own limited company but are technically an employee for all intents and purposes.

Some contracts will be ‘within IR35’ and some won’t – it depends on the client you’re working for and the nature of the contract.

Generally, the end client is the one responsible for figuring out the IR35 employment status of a contractor. However, if you’re providing contracting services to a small client outside the public sector, an intermediary may be responsible for deciding your employment status and if IR35 rules apply.

If the rules do apply, your client should deduct income tax and National Insurance from your invoice before they pay you and send these deductions to HMRC on your behalf – just like they would if you were a regular employee.

This means the payment you receive from the client is the ‘after tax’ amount, so you’ve already paid tax on it. Make sure to document this accurately on your Self Assessment tax return so you don’t end up paying tax on it twice.

 
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The post Do I Need to Tell HMRC I’m a Contractor for CIS? appeared first on The Cheap Accountants.

Rather than one single employer taking on a variety of staff, there’s normally an overall project manager who takes on contractors. In turn, they’ll often use subcontractors to help deliver the work they’re contracted to do.

This hierarchy means that contractors and subcontractors often have different responsibilities; both on site, and in terms of reporting and paying tax.

What’s the difference between contractors and subcontractors?

As the name suggests, a contractor is a person or business who carries out work for an organisation without being employed by them. This is normally for a particular project (known as a contract), on a temporary basis and for a specified length of time, rather than on a permanent basis as an employee.

A subcontractor is similar, in that they also work as an independent person or business, rather than as an employee of the contractor. A contractor will often hire in a subcontractor to help them fulfil the terms of a particular contract that they’re working on. For example, if they need more people power, or a particular skill or trade.

Contractors, subcontractors, and tax

Contractual and sub contractual work is most commonly found in trades such as electrics, plumbing, decorating, and gardening. It can also be found in creative capacities such as photography, videography, graphic design, and copywriting.

Where the latter is concerned, contractors and subcontractors are generally responsible for managing their own tax payments and submitting their own Self Assessment return.

More specifically where construction is concerned though, something called the Construction Industry Scheme (CIS) comes into play.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is an initiative which deals with the way subcontractors pay tax. The scheme encompasses the majority of construction workers involved in site preparation, decorating, and refurbishment.

However, it doesn’t cover some related jobs such as carpeting, material delivery, managing site facilitates (e.g., an on-site canteen), scaffolding hire, architecture, or surveying.

It covers mainstream contractors who fall under the criteria of builders, property developers, labour agencies and gangmasters. In some circumstances, it might also cover housing associations, arm’s length management organisations (ALMOs), local authorities and government departments.

How does CIS work?

Under CIS, a contractor deducts money from a sub contractor’s payment, and then passes this onto HMRC towards what the subcontractor pays in tax and National Insurance. It’s a bit like the way that an employer deducts tax and NI from an employee’s wages before paying them.

These CIS payments are due to HMRC by the 22nd of every month (or by the 19th if you’re paying by post) and there are late payment penalties of up to £3,000 if they go overdue.

Before all of this can happen though, the contractor will need to register for the scheme.

You’ll be required to register under CIS as a contractor if:

• You pay subcontractors to carry out construction-based work.
• Your business doesn’t fall under the category of construction work, but you’ve spent more than £3 million on construction in the 12 months since making your first subcontractor payment.

If you meet these criteria, there are specific regulations that you must adhere to:

• You’ll need to register for the scheme before you make your first subcontractor payment.
• You must make sure that you’re right to use this person as a subcontractor, rather than as an employee. Making this mistake can come with a penalty (under disguised employment rules).
• Establish whether or not the subcontractor is registered under the CIS (known as verifying a subcontractor).
• Remember to file monthly returns and maintain comprehensive CIS records. Again, this can incur a penalty from HMRC if you fail to do so. Even if you haven’t made any subcontractor payments that month, you must still send your CIS return to HMRC!

You’ll need to tell HMRC the gross pay of each subcontractor, and about any deductions that you make (and keep this information for a minimum of 3 years).

Where do subcontractors stand on tax and CIS?

So, we know how the scheme works for contractors, but what about from the perspective of a self-employed subcontractor?

It’s worth noting here that subcontractors aren’t legally required to register for the scheme. However, should they choose not to, their deductions will be calculated at a higher rate than those who are registered.

When you start working with a new contractor, they will ask for your Unique Taxpayer Reference (UTR) number. This will then allow them to inform HMRC that they plan to take deductions from you. Using your UTR, HMRC can then let the contractor know what rate of deduction to apply to your payments.

The rate of tax that a contractor deducts from a subcontractor’s pay depends on whether or not they’re registered under CIS:

• Registered: tax deduction of 20%
• Not registered: tax deduction of 30%

The good news is that subcontractors who pay the 30% rate are usually able to reclaim the difference between that and what they would have paid at the 20% rate, once they submit their Self Assessment tax return.

It’s one of the reasons why getting your tax return in earlier is particularly important for subcontractors: the sooner you submit, the sooner you get your rebate!

Need more help with your contractor accounting? Get an instant quote for contractor accounting services, or ask a tax question for free.

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