If you work in construction you may have heard of the Construction Industry Scheme (CIS). The CIS involves a contractor withholding an amount of payment from their subcontractors as tax, which is then paid to HM Revenue and Customs (HMRC). It is similar to when an employer deducts income tax from an employee’s wages on their behalf.
As a sub-contractor, you would first register with HMRC to let them know that you are working as a subcontractor. Next, any time you invoice your contractor client, they would deduct 20% from your invoice and pay the rest to you. This is known as the “net” amount while the amount with tax is known as the “gross” amount.
Reclaiming your tax
If you are a sole trader, you would record the total amount of tax deducted on your self-assessment tax return and this is set off against the tax you would owe from the profit on your gross income. If all of your income is affected by the CIS then you would likely have a tax repayment due to expenses and your personal tax-free allowance.
If you trade as a limited company, each month you record the tax deductions in your payroll and set these off against the tax and National Insurance Contributions (NIC) due for your employees and any of your own subcontractors. If you have a repayment due by the end of the tax year (5th of April) you can apply to HMRC in writing to recover that amount. You cannot recover the tax part-way through the year, even if you know it will be a repayment.
Other CIS tax rates
If you do not register as a sub-contractor as above, you will have the tax deducted at 30% from your earnings, which may be harmful to cash flow. However, if you can show that you pay your tax and NIC on time, run your business with a bank account and provide construction services in the UK, you may be able to apply for gross status. Gross status is where the contractor will not deduct any tax from your earnings.
When applying for gross status HMRC will look into your turnover for the last twelve months. In this time you must have at least £30,000 turnover from the labour element of your work if you are a sole trader. For limited companies and partnerships, you must have at least £30,000 turnover as above per director or partner or at least £200,000 turnover overall. When you have gross status, you must make sure to pay your tax as normal.
You can apply for gross status by contacting the CIS helpline on 0300 200 3210 or using the HMRC online service. To do so through the online service, you will need to go to “other services” from the “your tax account” section then choose “construction industry scheme – subcontractors”.
If you require more information or advice regarding the above, or with any other CIS or payroll related queries, please do not hesitate to contact us.