As a CIS subcontractor you are considered self-employed but working for a contractor who haas to deduct a portion of your invoice (usually 20%) and pay it to HMRC on your behalf. This situation is different to that of other self employed persons not working in construction who do not come under CIS and get paid the full amount invoiced gross with no deductions.
Being paid as a CIS subcontractor is not the same as earning a wage either, as you are not an employee. If you’re employed by a construction firm (as distinct from being a subcontractor ) you must go on the PAYE scheme and have your tax and National Insurance contributions deducted from your wages by your employer.
The Difference Between PAYE and CIS
Both PAYE employees and CIS subcontractors have tax deducted from their monthly payments but their legal and tax positions are very different. In many ways the differences between PAYE and CIS, and the pros and cons of being a CIS subcontractor ,boil down to the same things.
On PAYE you get holiday pay and sick pay but you don’t get any allowable expenses – though of course your employer should be covering all work related expenses for you.
On CIS you don’t earn on the days when you don’t work but you’re allowed to claim a number of expenses back at the end of the year which will reduce your tax bill.
Unlike self employed CIS subcontractors, PAYE employees usually have greater job security ,are entitled to protection under UK Employment Law and to receive redundancy payments
PAYE employees have their National Insurance payments deducted by their employer, who also pays Employers NI contributions for all employees. CIS subcontractors have to pay their own self employed National Insurance contributions,; their NI rates are different to those of employees and could be effectively less, depending on their income.
Self employed individual or limited company?
Since a CIS subcontractor can be a person or legal entity (effectively a company) there may be some tax advantages in forming a limited company. This will depend on your individual circumstances and is not a decision to be taken lightly.
You would be wise to seek advice from legal and accountancy professionals before deciding if this is the right thing for you. Needless to say, PAYE employees do not have the option of offering their services through a limited company.
Annual Tax returns
Unless they are fortunate enough to be earning over £100,00 a year or have an additional source of income apart from their PAYE wages, PAYE employees do not normally have to submit annual tax returns.
As self employed persons, CIS subcontractors have no choice – they are legally obliged to submit an annual tax return by 31 Jan of the following year. HMRC imposes fines and other penalties on subcontractors who fail to submit an annual tax return or send it in late or incorrectly filled.
Tax Refunds
Although theoretically anyone who has overpaid tax should receive a tax refund, in practice it is much more common for CIS subcontractors to receive tax refunds at the end of each tax year than for PAYE employees. This is because CIS subcontractors, unlike PAYE employees, can offset expenses such as travelling to work against income to reduce their tax liability. Also, as CIS subcontractors have to submit an annual return, it is effectively easier to claim back any tax refund due at the same time.
CIS subcontractors can even use professional tax services to submit annual returns and claim tax refunds on their behalf, saving them the hassle and anxiety of submitting correct tax returns on time… and making sure they get the refund they are due.