Contractors who choose to register under the Construction Industry Scheme (CIS) must make some tax deductions from their payments to their subcontractors. If their subcontractors are registered for CIS then there will be a 20% deduction. On the other hand, if their subcontractors are not registered for CIS then the deduction will be 30%.
The contractor will be responsible for paying these deductions to HMRC and these will be considered as an advance payment for the subcontractor’s tax liabilities. If you are a subcontractor, then you can choose to apply for gross payment status. In other words, contractors will pay you or your limited company the entire amount without any deductions.
In case you are a CIS subcontractor operating through your limited company, then if your contractor made any CIS deductions on your company’s income, then you can offset this against the Corporation Tax liability of your company. Or perhaps HMRC can refund this directly to the subcontractor after the end of every tax year.
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This situation is much the same as being a sole trader. However, in this circumstance, you can offset any CIS deductions made by your contractor against your Personal Tax liability and will be included in your Self Assessment.
You also need to learn about the effect of the government’s legislation on IR35 on your task. This is also referred to as off-payroll working. If you are either a subcontractor or a contractor and your task is being influenced by IR35, then these rules will be given more preference than any CIS rules.
How Can IR35 Affect CIS?
The government’s legislation on IR35 is a tax law created to fight tax avoidance committed by workers who are providing services to clients through an intermediary like a limited company. Although, it does not necessarily apply to anyone who works as a sole trader and pays National Insurance and Income Tax via the annual Self Assessment process.
When it comes to IR35, its rules on employment can also be applied on the sole trader who works on a contractual basis for an end client and they are deemed to have an employer/employee relationship based on their working attitudes. During this particular situation, the end client would be considered as the employer of the worker or the sole trader and would be responsible for paying employment taxes.
Worked Example To Show How CIS Works
The relations in these transactions are complicated, so in order to avoid any confusion we’ve broken them down into different situations which you might come across.
CIS if you as a sole trader or your limited company is the subcontractor only
If you are a CIS subcontractor who works for a contractor, then most probably your pay will have a deduction of either 20% or 30% intended for CIS payments. You or your limited company does not have any subcontractors as part of this agreement.
The original contractor is required to submit a monthly report to HMRC which indicates the deductions being made from all of its subcontractors where they are a sole trader or a limited company.
Your limited company should include the CIS amount that the contractor deducted from your pay on your Employment Payment Summary (EPS). Furthermore, your company is required to file an EPS to HMRC all through the tax year since this is considered as part of its PAYE systems.
After the tax year has finally ended and you are done with your Final Payroll Submission (FPS), then your limited company can fill out an online form through your government gateway account. The total CIS deductions that your contractors deduct from your pay will be used by HMRC in reducing your company’s Corporation Tax liability. In case there is any CIS credit that’s left, then this will be refunded back to your company.
If you are a sole trader, then the CIS amount deducted by your contractors all through the year should be included on your annual Self Assessment. Consequently, this can help in reducing your personal tax bill. Similarly, if there are any CIS credits that are left then you can expect that this will be refunded back to you.
Your limited company is paying subcontractors
Your limited company is hiring subcontractors and paying them for the work they’ve done. There are no other works that are meant for another contractor.
Your company is required to file a monthly report to HMRC detailing certain information such as the CIS amount deducted from your subcontractors. This report should include all individuals and businesses you hire as CIS subcontractors.
Your limited company will be liable in paying for all the deductions intended for HMRC, which is just similar to other PAYE taxes that are paid.
You hire subcontractors but you’re a sole trader
You are working as a sole trader, yet on some or all of your tasks, you hire subcontractors to do the work and pay them as well. There are no other works that are meant for another contractor.
Even though you are not required to run payroll in order to pay yourself being a sole trader, yet if you pay subcontractors you have to run CIS payroll for them. Furthermore, you also need to accomplish a monthly report and send them to HMRC detailing some important information such as the CIS amount that you have deducted from your subcontractor’s payment. The report should be made for all individuals and businesses that you hire as CIS subcontractors.
You are also required to pay all the deductions intended for HMRC just like any other PAYE taxes that are paid.
You or your limited company is working for a contractor and is also paying subcontractors
You or your limited company (get advice from our online accountants for limited companies ) offers services to a contractor, and at the same time, you also use subcontractors.
When this situation occurs, you will have to combine the two prior scenarios:
- The payments that your limited company will receive from your contractor will contain some necessary CIS deductions.
- Moreover, the payments that you make to your subcontractors will likewise contain some necessary CIS deductions.
- The amount that your limited company needs to pay to HMRC will depend on the difference in these two amounts.
If you are operating as a sole trader then the circumstance is just the same but you have to ensure that you are running CIS payroll for some or all of your subcontractors.
The following is how we can summarise the above situation:
CIS deduction made by the contractor =£10,000
CIS deductions that you or your limited company apply to your subcontractors = £5,000
The amount that you or your limited company will pay to or receive from HMRC = £5,000 This amount will be charged to your HMRC account.
CIS deduction made by the contractor =£5,000
CIS deductions that you or your limited company apply to your subcontractors = £10,000
The amount that you or your limited company will pay to or receive from HMRC = (£5,000) This amount should be paid to HMRC.