The Construction Industry Scheme (CIS) was created in the early 70s to reduce the potential for tax evasion in the industry. If you are a contractor or subcontractor involved in construction, it will undoubtedly form a vital backdrop to your operation.
Tax matters can be complicated at the best of times and adding in CIS doesn’t always make things easier. Here we take a look at what you need to consider when completing a CIS tax return and how to claim a rebate if you have paid too much tax.
What is a CIS Tax Return?
If you are a builder who provides construction services for homeowners and doesn’t subcontract any of the work, CIS does not apply to you.
If you are a contractor and hire third parties to do construction work for you or you are a subcontractor who provides those services, you will need to be aware of CIS and factor it into your annual tax return.
Contractors who hire another business such as a bricklayer or plumber to do construction work for them are obligated to tax that individual or company when you pay them and then give that tax directly to HMRC.
If the subcontractor is registered for CIS as well as the contractor, the tax rate is a standard 20%. If they are not registered, it is 30%. Some businesses, however, are exempt because they have applied to be paid gross.
Is the CIS Scheme compulsory?
If you are a contractor in the construction industry, you must register for CIS. For subcontractors, it is not exactly compulsory but not registering means that you get charged a 30% tax rate rather than a 20% one by HMRC by your contractor.
CIS is a little like PAYE as if you were working full-time for the contractor. If you have overpaid your CIS tax throughout the year, of course, you will be able to get a refund when you complete your annual return.
Do I need to submit a CIS Tax Return?
The short answer is yes. There is slightly more admin required for a CIS tax return if you are a sole trader and do self-assessment but it’s not difficult. You should ensure that you keep any records, invoices and statements relating to work that was carried out for contractors.
For limited companies, the process of submitting a CIS tax return is slightly different and a little more complicated. For instance, a tax refund can be used to offset corporation tax.
How Do I Complete a CIS Tax Return?
How you complete a CIS tax return will depend on whether you are a sole trader or a limited company or partnership.
1. Sole Traders
If you act as a subcontractor, it’s important to register for CIS if you want to avoid higher levels of tax when you have completed a particular project. In short, if you are not registered, you will be charged 30% and then have to reclaim any overpayment on your annual tax amount later.
The easiest way to complete your return is to use online assessment with the SA100 form.
There is a section on the form for subcontractors and all you have to do is put in the amount you have had deducted in tax over the year. The online service will then calculate your tax return taking CIS into account.
2. Limited Companies
If you are a limited company you must file monthly reports to HMRC through the EPS or employment payment summary including any contracting/subcontracting payments. When you do your annual tax return with the final payroll submission, you will be able to calculate what you owe and what amount you may need refunding.
You can apply online to refund excess payment of CIS tax and use it either to offset liability for corporation tax or have it paid into your business account directly.
I’m a Sole Trader but also subcontract work: What should I do?
This can get slightly more complicated and it’s a problem many builders and other construction workers have. Although you don’t run payroll as a sole trader, you will need to run a CIS payroll. You are obligated to register as a contractor with HMRC and produce the same sort of monthly report that limited companies need to provide.
I’m acting as a Subcontractor and Contractor: What Should I Do?
You essentially need to wear two hats and keep good records. It’s a good idea to have a professional accounting system for doing this.
- If you act as a contractor you will need to register for CIS, work out the tax for your subcontractor, produce monthly reports and pay the tax directly to HMRC.
- If you are a subcontractor, you will need to factor in any deductions made by your contractor when you come to do your final annual returns.
How do I claim my CIS Tax back?
The fact that tax is paid upfront rather than at the end of the tax year means that contractors and subcontractors often end up paying more in the short term.
For sole traders who undertake self-assessment, the process is relatively easy. You will need to use the CIS section on the form to input your deductions throughout the financial year. The online service will then calculate your return. If you are eligible for a rebate, this will automatically be processed and paid back into your account within weeks.
Limited companies can’t claim a refund on CIS payments until they have processed their end of year full payment submission. If you deal with your own accounting, you can request a refund through the HMRC portal.
It takes on average about 40 working days to process and provide payment. Companies can use this refund to offset their corporation tax or have the payment put directly into their business account.
If you use a tax agent or accountant, they will manage on you behalf your request for a CIS tax refund.
All individuals and companies who contract or subcontract in the construction industry need to register with CIS. This means subcontractors pay tax on their earnings before they complete their annual return. These advance deductions can be reclaimed if there is an overpayment once the final return is processed.