The Construction Industry Scheme (CIS) for subcontractors can be a game-changer in this sector. Research shows that a large proportion of workers are on the wrong tax code.
Of those that checked their code to see if it was correct, 43% were on the wrong tax code, and almost three-quarters were overpaying tax. So how many UK construction workers are paying more tax than they owe?
Luckily, schemes are in place to help those workers claim back their money. CIS for subcontractors specifically includes tax refund provisions that allow them to submit a claim for the amount they have overpaid as long as they maintain complete records of all receipts and expenses.
While signing up for CIS is not mandatory if you are a subcontractor, we highly recommend it for the tax benefits you will get. It is a fairly simple process – and if you need hands-on help, our dedicated team at Lyel Accountants would be delighted to step in!
Let us start with the basics:
What is the CIS system, and who qualifies for it?
Under the Construction Industry Scheme, a construction constructor deducts a fraction of the money they owe their subcontractor at source. The deducted amount is passed on to HMRC, which counts as the subcontractor’s tax and NIC – essentially, it is like an advance tax payment.
You are eligible for CIS for subcontractors if you offer construction services like site preparation, decorating, refurbishing, or labour.
Some construction-allied activities like carpet fitting or materials delivery do not qualify – ask our accountants about which category your business falls into.
If your business is based outside the UK, but you are subcontracting in the UK, you will still have to follow the same rules as local subcontractors. However, there could be exceptions in case Double Taxation rules apply to you, depending on whether you pay taxes in your place of domicile or the UK.
Note that you do not have to register for CIS compulsorily. However, you will be charged a higher tax deduction if you do not. So most subcontractors end up registering anyway. The deduction is 30% if you are unregistered but only 20% if registered.
Plus, if you pay taxes in the UK, you are entitled to a yearly tax-free personal allowance, which the tax deductions do not factor in. So it makes all the more sense for you to register and then claim a CIS refund – the net amount you have overpaid as a refund.
CIS for subcontractors: A step-by-step guide to registration
To register as a subcontractor in the UK, you will need:
- National Insurance (NI) number
- Legal business name or trading name
- VAT registration number (if you have one)
- Your unique taxpayer reference number as a business
You must register separately if you qualify as a subcontractor and a contractor. You are deemed a contractor for CIS purposes if you have spent a million pounds a year on construction within three years.
Registration is necessary whether you operate as a sole trader, a partnership or a limited company. If you want to register as a partnership or limited company, you will first need to register as a sole trader, and then HMRC will record your partnership/company separately.
Records needed to claim a CIS refund
You can claim back various allowable business expenses and thus increase your tax refund. These include plant and equipment, office expenses, insurance expenses, clothing, and so on (ask your accountant whether a specific expense is eligible for claiming back).
To claim a CIS refund, you must complete proof of all expenses and all amounts claimed against your quarterly or monthly PAYE bill. Ensure you have a copy of your bank statement (physical and electronic) and copies of all receipts and invoices.
If you do not already, use a debit or credit card for all business transactions so, there is always a record of where your money is going.
How to claim your CIS tax refund
The claims process will depend on whether you are registered as a sole trader/partner or a limited company:
Sole trader/partner
- You must submit your completed Self Assessment tax return, with complete records of all invoices you have received as well as any deductions your contractor has made under the “CIS Deductions” field.
- Your tax accountant will draw up your tax and NIC bill minus any deductions by the contractor.
- After all calculations, HMRC will issue the net CIS tax refund you are entitled to. Otherwise, you must pay any pending tax dues by January 31.
Limited company
- You must submit a corporation tax return and declare all your income.
- You must also send your full payment submission and employer payment summary. HMRC will then adjust any CIS tax refund against your PAYE and NIC.
- Any CIS deductions will be paid back through your company’s payroll scheme.
- You can also carry forward any unpaid CIS deductions from your PAYE bill to the next month or quarter (as long as it is the same tax year). You must mention on your employer payment summary that you have nothing to pay.
CIS benefits for subcontractors
Navigating CIS can be challenging due to the intricacies of what construction work is included or excluded. However, it is a critical system for the benefit of both contractors and subcontractors. Here are the main CIS benefits for subcontractors:
1. Tax deduction at source
If registered under the CIS, contractors will deduct a flat rate of 20% from your payments instead of the higher 30% for unregistered subcontractors. This means you will have a lesser amount deducted upfront from your pay.
2. Easier record-keeping
With tax already being deducted at source, you do not have to worry about setting aside money to pay your tax bill at the end of the year. It simplifies bookkeeping, but you must maintain proper records of all payments and deductions.
3. Annual repayment claim
If too much tax has been deducted over the tax year, you can claim a repayment when completing your Self Assessment tax return, offering potential CIS tax refunds.
4. Business recognition
Being registered for CIS can give a subcontractor a certain level of professional credibility. Contractors often prefer to work with CIS-registered subcontractors because it simplifies their tax responsibilities.
5. Gross payment status
If you meet certain conditions, you can even apply for ‘gross payment status.’ This means that you will be paid in full without any deductions. However, you will still be responsible for paying the right amount of tax and NI at the end of the tax year. This can benefit you by improving cash flow and simplifying their payment process.
Over to you
For peace of mind and to ensure you are fully compliant while maximising the available CIS benefits for subcontractors, it is wise to consult experts.
At Lyel Accountants, we pride ourselves on our deep expertise in the construction sector and our adept handling of specific CIS tax return regulations. We have assisted numerous subcontractors in leveraging the advantages of their CIS status.
Contact us today. Your CIS concerns are in capable hands with us.
