A Tax Guide For Subcontractors Under CIS

Self Employed Builder CIS Construction Industry Scheme

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Contents

In this article we discuss:

Introduction

This tax guide aims to give self employed subcontractors under CIS (the construction industry scheme) a better understanding of the tax requirements side of their business, which many self employed builders may find a daunting task.

When you work for yourself as a self employed individual under the construction industry scheme, income you receive has either 20% or 30% tax deducted from it at source.

We cover how to register as a self employed builder, tax and national insurance contributions, allowable expenses, when and how to pay your tax, completing your annual return, and more.

This guide is for sole trader building contractors under CIS, and doesn’t cover a Limited Company, where different rules apply.

Working for yourself has so many benefits. Whether you are a Limited Company or a sole trade, you decide the rules, who you want to work for and when. Taxes can be a big factor that put many people off working for themselves.

Simple Taxes are here to change that. Specialising in taxes and tax returns for the self employed worker, let your dedicated accountant worry about the tax requirements side of your business for you.

While using a professional accountant isn’t a legal requirement, it can be extremely beneficial. With a keen eye for spotting allowable expenses, they will ensure you remain compliant with HMRC legislation when it comes to your tax affairs. They should also be able to save you some money!

What Is The Construction Industry Scheme (CIS) And How Does It Work?

The CIS scheme (construction industry scheme) was introduced as a HMRC scheme to collect income tax throughout the tax year from construction workers, by a CIS deduction.

The scheme helps CIS subcontractors by making sure they pay the right amount of tax on their earnings.

This means building subcontractors under CIS don’t need to worry about putting tax to one side to owe at a later date.

CIS contractors must withhold tax when paying subcontractors, under CIS rules.

The contractor will request the subcontractor’s UTR number and withhold 20% tax (if the subcontractor is CIS registered) or 30% tax (if the subcontractor not CIS registered).

The contractor will then complete monthly CIS returns and the CIS tax deducted is paid directly to HMRC on behalf of the subcontractor.

This CIS tax deducted is basically an advance payment of the subcontractor’s tax that would be due at the end of the year (5th April) when completing their self assessment tax return.

What Is The Difference Between A CIS Contractor & A CIS Subcontractor?

A contractor deals with the end client and pays subcontractors to assist with the job. Usually responsible for the full project.

A subcontractor worker reports to the contractor rather than the end client. Usually hired to assist with a specific area of the project.

Are Building Subcontractors Under CIS Self Employed?

When you work for a contractor who pays you as a subcontractor worker, even through you will have tax deducted at source under CIS, you are still classed as being a self employed sole trader.

You must therefore inform HMRC that you are self employed and working as a CIS subcontractor.

What Do I Need To Do To Start Trading As A Subcontractor Under CIS?

To trade as a building subcontractor under CIS you must complete the below simple steps:

  1. Register for self assessment either via the HMRC website, or a Simple Taxes accountant. You will be provided with a UTR number which any contractor you work for will request, so that they can verify you with HMRC

  2. Register as a CIS subcontractor – this can be done at the same time as registering for self assessment, even though they are two separate registrations. If you already have a UTR number and HMRC login you can register through your HMRC online login

  3. When registering for CIS you must select net or gross payment status. All CIS subcontractors are eligible for net payment status, where your tax is deducted at source. You must meet certain criteria to qualify for gross. We discuss this in more detail later in this blog

  4. Call the HMRC CIS helpline, or speak to an assistant online, if you need further help.

Why Do I Need To Register For CIS?

When you are working for yourself as a self employed subcontractor in the construction industry, you don’t HAVE to register for CIS. However, it is in your best interests to do so.

If you don’t, under CIS rules, you will have CIS deductions at source of a huge 30%. When you are registered, you will only have CIS deductions at source of 20%.

Net Payment Status & Gross Payment Status For CIS Workers Explained

Net payment status:

Gross payment status:

When Do I Need To Tell HMRC I Am Self Employed?

When your gross income (before any deductions) goes over the £1,000 trading allowance in a tax year (6th April to 5th April), you will need to inform HMRC you are self employed and complete a tax return.

Once the tax year ends on 5th April that you exceed £1,000, you will need to inform HMRC and register as self employed by 5th October.

How Do I Register as Self Employed With HMRC?

You can let HMRC know you are trading as self employed online through the HMRC website.

Alternatively, our Simple Taxes accountants can do this for you.

How Do I Claim A CIS Tax Refund?

In most cases building subcontractors under CIS will have overpaid tax and be due a rebate at the end of the year.

This is due to the CIS deductions taken from subcontractors at source not taking utilising their tax free personal allowance (currently £12,570 in 22/23).

They can get this tax back from HMRC after the tax year end 5th April.

A CIS tax refund is claimed by completing your annual self assessment return.

Don’t forget to include your business bank account details on the tax return if you would like your refund claim paid directly into your bank. Otherwise HMRC will issue a cheque in the post.

What Do I Need To Include In My Self Assessment Tax Return

Your tax return should include:

What If I Have Made A Loss?

If you make a loss in the tax year, due to your business costs exceeding your income received, you will have no income tax bill. You must however still declare your self employment figures to HMRC.

The loss can be carried forward and offset against future self employment profits.

Or alternatively, if you have employment income, the self employment loss can be set off sideways against your employment income, which may result in a tax rebate.

When Do I Need to File A Tax Return and Pay Tax?

The tax year ends on 5th April each year. You then have until 31st January the following year to file your return and pay any tax due on any profits.

If your tax liability (not profit) exceeds £1,000 you will be required by HM Revenue & Customs to make payments on account towards the following tax year. These amounts are payable on 31st January and 31st July.

If you file your return and pay tax after the 31st January deadline, you will incur penalties.

What Income Do I Pay Income Tax and NI On?

You will owe tax and National Insurance on any income not taxed at source.

This is your total income in the year, less any business related expense deductions.

What Allowable Costs Building Subcontractors Under CIS Claim?

When calculating your taxable income for the year, you can claim allowable expenses as tax deductions against your income, to arrive at your taxable profit figure.

Below is a list of business expenses that building contractors under CIS can claim as deductions against their income, to reduce their tax bill. Every expense claim must be wholly and exclusively for business use:

How Do I Pay Any Tax Liability Due?

You can pay any tax you owe using your online HMRC account.

If you don’t have an online login you can set one up here (select create sign in details).

Alternatively, you can see here the other methods of paying HMRC:

What Are the 22/23 Thresholds and Rates?

Income tax is payable at 20% for profits over the £12,570 tax free personal allowance. This increases to 40% for any income over £50,270

Class 2 NI is a set weekly amount of £3.15 when your profits exceed £6725. Class 2 NI contributions ensure you get your annual tick towards your state pension. As soon as you reach state pension age, you stop paying Class 2 NI if you are still working.

Class 4 NI is 9.73% of any profits over £11,909

Sound complicated? Don’t worry! When you complete your tax return online HMRC automatically calculates any tax due for you. Or you can use the service of a qualified accountant such as Simple Taxes who will be able to offer professional advice specific to your current situation. Added bonus – you can claim any accountant fees as an expense!

What Records Do I Need to Keep?

When you work for yourself you are legally required to keep all of your business records (business account bank statements, sales invoices, purchase and expenses invoices), for 6 years plus the current year.

This is in case HMRC ever ask you for proof of your refund claim and figures. They can issue penalties if the required documents not available.

Documents building subcontractors under CIS must keep should include:

How Can I Keep My Accounts & Business Finances Organised?

Here are a few tips for keeping accurate records and keeping on top of your business accounts and money, which will in turn help you complete your self assessment returns at the end of the year:

Further Information

For further information on self employment, please read the HMRC guidance here.

If you are unsure how much tax you need to pay, and need help with your taxes, get in touch with our expert team today at www.simpletaxes.co.uk . Send your details to Simple Taxes today, for a fast reply within 24 hours from your own dedicated accountant.

Disclaimer

The information contained in this blog is for general information purposes only, and not for accounting and tax advice. You should speak to a qualified professional about your specific circumstances before acting upon any of the information in this blog.

Date Published: March 2023

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