If you’re planning to work as a sub-contractor in the construction industry, then it’s worth knowing that most construction-based trades will fall under the Construction Industry Scheme. CIS affects how you get paid by the contractor who hires you, so this blog takes a closer look at what CIS is and what you need to do.
A quick introduction to CIS tax
CIS was introduced in 1971 to ensure that tax is collected from payments made to subcontractors in the construction industry. With a few exceptions, any business operating in the construction industry will be classed as a “contractor” under CIS and will need to register.
If you are a freelancer carrying out work for a contractor that is registered with CIS, you will be classed as a “sub-contractor” and will also fall within the rules of CIS. There are a few exceptions to this, for both contractors and sub-contractors. The main exceptions are:
- Architects and surveyors
- Scaffolding hire (with no labour)
- Carpet fitting
- Material delivery
- Work on construction sites that is obviously not related to construction, such as catering and facilities management
What does CIS mean for contractors and sub-contractors?
A contractor that is registered with CIS must deduct a fixed amount from the payments they make to sub-contractors. The amount they deduct depends on whether the sub-contractor is registered or not:
- Registered: The contractor deducts 20% from the subcontractor’s payment, and submits it to HMRC.
- Not registered: 30% deduction
- Gross Payment Status: 0% deduction
The deduction is paid directly to HMRC and is treated as an advance payment of the subcontractor’s tax and National Insurance Contributions (NIC).
Does CIS depend on how I work?
CIS applies to sole traders, partnerships, and limited companies, both as contractors and sub-contractors.
So, if you are in a trade or profession that falls within CIS, and you carry out work for a CIS registered contractor, you are automatically within CIS.
How CIS works in practice
Before you carry out work for a contractor, they will need to verify you with HMRC. They’ll need your Unique Taxpayer Reference number (UTR) and NI number if you’re a sole trader or in a partnership, or your company UTR if you’re a limited company.
It’s important to give the contractor the correct information, including the exact trading name you’ve registered with HMRC. If the details are incorrect, you will be classed as unregistered and pay the higher deduction of 30% – ouch!
After they submit the request for verification, HMRC will tell the contractor how much to deduct. You can still carry out work for the contractor without being registered for CIS but will pay 10% more in deductions. So, it pays to register, and can make managing your cash flow easier.
If you do pay the 30% rate, you’ll be able to reclaim any overpaid tax as a rebate once you submit your Self Assessment. So, it also pays to get that in sooner rather than later!
The contractor submits a return to HMRC once a month and you receive a statement or payslip showing the gross payment and amount that’s been deducted.
This is probably not the amount you will actually owe in tax and NICs as, unlike the PAYE system for employees, the deduction is a flat rate and doesn’t take into account your personal allowance or any other earnings you might receive. The personal allowance is the amount of income you can earn before starting to pay tax on it.
When you fill in your Self Assessment tax return you’ll enter the amount of deductions paid under CIS, and HMRC calculates whether you owe more tax and NIC, or are due a refund.
Gross Payment Status under CIS
As a sub-contractor, you can apply for Gross Payment Status if your business passes several tests which are mainly:
- Your business does construction work in the UK (or provides labour for it)
- A good track-record of paying tax and NIC on time
- Turnover of at least £30,000 per year, excluding VAT and cost of materials
- In the case of partnerships or limited companies, then it’s at least £30,000 turnover for each partner or director, or £100,000 for the whole partnership or company
HMRC will confirm if you have Gross Payment Status, and you will receive payments without deductions. You will then have to show the gross payments on your Self Assessment or company tax return, and pay the appropriate tax and National Insurnace on it.
Responsibilities under CIS
It’s important to know who is responsible for what under CIS. Firstly, you need to decide whether you are a contractor or sub-contractor. It sounds obvious, but you can be both! For example, if you are engaged by a contractor to carry out a particular job, then you are acting as a sub-contractor. But if, in order to do the job, you then take on sub-contractors yourself you are now also acting as a contractor.
Whilst you can work as a sub-contractor without registering with CIS, you have a legal obligation to register if you act as a contractor.
The contractor must verify the sub-contractor’s status before work commences and then they are responsible for deducting the correct amount, filing a monthly return, and paying the deduction to HMRC. They must also provide a monthly statement or payslip showing pay and deductions.
Contractors must also keep records of all payments and deductions for sub-contractors for at least 3 years, along with various other reporting responsibilities regarding changes in their business.
As a sub-contractor, your main responsibility is to provide accurate information for the verification process, and to maintain records of payments received and deductions made. This information will be on the monthly statement or payslip you receive.
Whilst you do not legally have to register for CIS, it makes good sense to register as you’ll pay 10% less in deductions.
It’s also important that you understand that CIS is not a replacement for the Pay as You Earn (PAYE) system for employees. You must account for tax yourself under Self Assessment if you’re self-employed, or a company tax return if you’re a limited company.
Accounting for tax as a freelancer under CIS
It’s common to overpay tax under CIS because the deductions don’t take into account your personal tax allowance, or any tax relief that you can claim on allowable expenses .
If you’re owed a refund, the sooner you submit your self-assessment return, the sooner you’ll receive what you are due so it’s worth doing it early. And if that all seems like a headache, why not get a professional to do it for you.