The CIS (Construction Industry Scheme) lays down the rules on how subcontractors must be paid and what tax must be deducted from payments to subcontractors.t The Scheme can be confusing to non-tax professionals. So here’s a run-down of the most important things you need to know about it:
1: Contractor or Subcontractor?
If you’re a contractor you need to register with CIS to pay your subcontractors. If you’re a subcontractor, you need to register in order to be paid.
The CIS deems you to be a contractor if your business engages subcontractors rather than has full time employees; or if your business spends more than £1m per year on construction related activity.
The CIS defines a subcontractor as any person or entity that agrees to do construction work for a contractor. So basically, unless you are an employee on PAYE, if you’re working in construction and CIS does not define you as a contractor – then you are by default a subcontractor.
2: Payments and Percentages
If you’re a subcontractor, you send an invoice to the contractor every month. If you are properly registered with CIS, the contractor takes 20 per cent off the amount invoiced for labour (not on VAT if VAT is applicable, or on cost of materials) and puts that in your tax pot.
If you are not registered with CIS or If you have incorrectly registered with CIS (for example with wrong address details) you may be liable to pay a 30 per cent rate instead.
3: Your Employees and Subcontractors
If as a subcontractor you have people working for you as employees you must pay them through PAYE. However if your workers are considered self employed subcontractors, you effectively become a contractor and In this case your subcontractors must also be paid through CIS.
4: Being Both a Contractor and a Subcontractor
So you can be both contractor and subcontractor at the same time: paying your crew through CIS, and accepting payment from your own contractor by the same means. In this case you will have to submit monthly CIS returns for your workers as a contractor and an annual return for yourself as a subcontractor. (see below)
5: Monthly Returns and Record Keeping for Contractors
A contractor under CIS must fill out monthly returns detailing payments made to and tax deducted from all subcontractors. This is done online and provides information for HMRC, which will be used in calculating end of year returns for subcontractors.
6: Annual Returns and Refunds
As a subcontractor, you must fill out an annual CIS tax return. The return details all of your invoicing in a full tax period minus all allowable expenses and is used to determine how much tax you should pay. . If during the tax year your contractor under the CIS scheme deducted more tax than you actually owed , the difference is your tax refund, which is paid by cheque from HMRC”.
It is very likely that once you have submitted your Annual return, you will be entitled to a refund. The majority of people never receive the full entitlement because they simply don’t know what they are entitled to claim back.
7: Allowable Expenses for CIS subcontractors
Under CIS subcontractors may claim refunds for any VAT they have incurred on goods or services expenses including mileage on business vehicles, insurance and any clothing, tools, plant or materials bought or hired for work purposes.
On average, it is estimated that £300m is lost to incorrectly claimed expenses every year. That’s money you’re entitled to, which never comes back to you.