Yes, if you are a self-employed contractor you do need to tell HMRC so that you can pay the right amount of tax on your earnings. If you work as a contractor in the construction sector, then you’re also legally obliged to register for the Construction Industry Scheme (CIS) before you can start paying subcontractors for any construction-related work.
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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