The Construction Industry Scheme (CIS) rules affect the way subcontractors carrying out construction work in the UK pay tax. Under the scheme, contractors are responsible for deducting tax from a subcontractor’s invoice before making payment, and then reporting this to HMRC using a CIS return.
As a subcontractor these deductions are basically an advance payment towards your tax bill for the year, so you’ll still need to submit a tax return even if CIS tax is deducted by someone you carry out work for.
How much are CIS deductions?
This depends on whether or not the subcontractor is registered for the Construction Industry Scheme. Contractors must verify their new subcontractor with HMRC before any work starts, so they can confirm their registration and tax status.
This CIS registration status is important, because it affects how much the contractor must deduct from the subcontractor’s invoice before they pay it.
| When you need to use it | Deduction rate |
| If the subcontractor isn’t registered for CIS, or HMRC can’t verify them | 30% |
| For subcontractors who are registered for CIS | 20% |
| When the subcontractor has gross payment status and no deductions are made | 0% |
Am I a subcontractor or a contractor?
Contractors are hired to carry out specific tasks, and sometimes hire subcontractors to carry out work for them. It’s crucial that you know whether you’re considered a contractor or a subcontractor under the Construction Industry Scheme rules, so that you pay the right amount of tax and National Insurance and report the correct information to HMRC.
As far as the Construction Industry Scheme (CIS) is concerned, a subcontractor is a business or organisation which agrees to carry out construction work on behalf of a contractor.
You might accept the contract as a self-employed sole trader or through your own limited company, or as some other type of business structure such as a partnership. Subcontractors can also be:
- An agency or organisation which carries out construction work for a contractor using its own workers, or which supplies them to a contractor. This is different to an agency which ‘introduces’ someone with the intention that the contractor becomes their employer.
- A local authority or some other type of public organisation
- A gang leader (sometimes known as a ganger) who is contracted to coordinate and supervise a team
Is being a subcontractor the same as being an employee?
No, being a subcontractor isn’t the same as being directly employed by a contractor. Rather than working for the contractor as a regular employee, the contractor is basically your client.
That said, it’s the contractor’s responsibility to assess your employment status when you agree to carry out any work for them as a subcontractor. They should use HMRC’s Confirmation of Employment Status Tool (CEST) to do this – it’s not up to them to choose!
Can a contract be exempt from CIS?
Not every contract will come under CIS rules, for instance if the work is being paid for by a trust or a charity. There are also some circumstances when HMRC will exempt a contract from CIS.
For example, if a contractor pays a subcontractor to carry out work worth less than £1,000 on property which belongs to them (not including the cost of materials). Exemptions aren’t given automatically though, so you’ll need to call the CIS helpline on 0300 200 3210.
Does CIS only apply in the UK?
Yes, the Construction Industry Scheme only applies to work taking place in the UK. A UK firm can have a contract to carry out work overseas and CIS won’t apply. On the other hand, an overseas firm doing construction work in the UK might be subject to CIS, so always check!
What do I need to do if I’m a subcontractor?
If you do fit the criteria of a subcontractor working in the construction industry, then ideally you should register for CIS as soon as possible. Registering means that contractors will make deductions at the lower rate, and this can make it easier to manage your cash flow throughout the year.
You’ll also need to give information to the contractor you’re carrying out work for, so that they can verify your CIS registration status. The information you provide depends on how you operate your business:
- Sole trader: Your Unique Taxpayer Reference (UTR) number and National Insurance number
- Limited company: Company name, registration number, and company UTR number
- Partnership: The name of the nominated partner, and the partnership’s trading name and UTR number
Do I need to submit a CIS return?
It’s the contractor’s responsibility to submit a CIS return each month, so as a subcontractor you won’t need to worry about that bit. You will need a CIS Statement from the contractor who pays you though, which shows how much you were paid, and how much tax was deducted for CIS.
You will still need to submit tax returns for your business as usual.
Subcontractors and Self Assessment
Remember the bit about the contractor you carry out work for deducting CIS tax depending on whether or not you’re registered for the CIS scheme? Well that can have a big impact on your Self Assessment tax bill. This is because the amount of CIS tax a contractor takes from your payment doesn’t factor in the tax-free Personal Allowance.
This is the amount you can earn in a tax year before starting to pay tax. To explain why this is particularly relevant for sub-contractors, we’ll look at how it works for a regular employee.
If you work for an employer
- They will normally apply the allowance to what they expect you to earn in a year
- This means that they’ll take the allowance into account when they work out how much to deduct from your wages each time that they pay you
- By the time you reach the end of the year, you’ve normally paid the right amount of tax (or very close to it)
If you’re a sub-contractor
- The contractor won’t take the allowance into account when they work out how much CIS tax to deduct before paying you
- As a result, some sub-contractors reach the end of the tax year having paid a lot of tax, but without using up their Personal Allowance
- This means that they’ve paid more tax than they needed to, and can claim a tax rebate once they submit their Self Assessment
So, if you’re a sub-contractor, it’s worth getting your return in as soon as possible, so you can reclaim any tax rebates sooner!
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