Construction Industry Scheme (CIS) For Sub-Contractors
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is where contractor withholds 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.
How does the CIS work for sub-contractors?
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 would 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 or online to recover that amount. You cannot recover the tax part-way through the year, even if you know it will be a repayment.
What are the 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 £100,000 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 accounting related queries, please do not hesitate to contact us.
Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.
