What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme, (CIS), is a system introduced by the government to ensure that contractors working within the construction industry pay tax .
The CIS sets the rules for how payments to subcontractors for construction work must be dealt with by contractors in the construction industry.
Subcontractors who are registered with a UTR number will be taxed at 20% on all income at source. If you don not have a UTR, you will be taxed at 30%.
Tax Returns
As a subcontractor, because you will be taxed at a set rate on all of your income paid under this scheme, you can be sure that the amount of tax you will pay over the course of the financial year will NOT BE CORRECT.
This is because most taxpayers will have a personal allowance of £10,000 in the year 2014/2015, (£10,600 as of 6th April 2015), which means that they should not pay tax on that amount.
So, if you earned £20,000 in that tax year, you should only pay income tax on £10,000. However, as you have paid either 20 or 30% of all earnings under CIS, you should be entitled to TAX REBATE.
If, however, your income was, say, £100,000 for the year, because income over a certain level should be taxed at 40%, you would find that not enough tax had been deducted and that you would need to make a balancing payment over to HMRC.
Whichever is the case, you will need to submit an end of year tax return.
Who is a CIS subcontractor?
If you’re self-employed and agree to do construction work for a contractor, you’re a CIS subcontractor. You should register with CIS.
Subcontractors can also be companies.
What obligations does the Contractor have?
Firstly, every contractor must register as such with HMRC.
It must then verify the status of it’s contractors. This can be done through HMRC's online CIS service.
Verification can only be done once a contract has been entered into, or once the subcontractor has accepted tender for work under a contract.
Depending on the registration status of the recipient, the subcontractor may then have to deduct tax. from the amounts paid, (excluding VAT charged and the cost of materials where applicable) .
Contractors must give a written statement to subcontractors from whose payments it makes a deduction and keep records of the gross amount paid, the cost of materials deducted, the amount of tax deducted and the verification number, if applicable.
The contractor must make monthly returns to HMRC,( even if no payments have been made).
What do you need to do now?
If you are a sub-contractor being paid under the CIS scheme and haven't already done so, you should register with HMRC.
They will need to know the name of your business, (which may just be your own name), and you will be issued with a unique taxpayer reference, (UTR).
Any contractor you work for will need this number in order to identify you on HMRC's system.
If you are eligible, you may be able to apply for 'gross payment' status and be issued with a subcontractor tax certificate which basically means that deductions won't be made from your payments. In order to qualify, you would need to satisfy the business, turnover and compliance tests set by HMRC.