Our tax preparation specialists tell you all about your responsibilities if you are a subcontractor under the Construction Industry Scheme (CIS)
At DSR Tax Refunds Ltd, we know that knowing your rights and responsibilities as a CIS subcontractor can be a tricky task. That’s why our experts want to help make life as easy as possible for you by sharing our specialist knowledge with you. So, whether you are wanting more information about VAT or need to know about charitable tax relief, our handy guides are here to help. All our information is based on HMRC sources, so you can rest assured that these guides are filled with helpful and accurate information.
What is a CIS Subcontractor?
If you work in the construction industry and work for a contractor, you should register for the CIS (Construction Industry Scheme) if any of the following apply to you:
- You are self-employed
- You are the owner of a limited company
- You are a partner in a partnership or trust
If you are registered as a subcontractor under the CIS, your contractor must deduct 20% from your subcontractor payments to pass to HMRC. These deductions go towards advance payment of your income tax and National Insurance bill.
You don’t have to register for the CIS, but if you don’t, contractors must deduct 30% from your payments instead of 20%.
If you decide that you don’t want contractors making deductions for HMRC on your behalf, you can apply for gross payment status – you do this when you register for CIS. If you have gross payment status you are responsible for paying your own income tax and National Insurance at the end of the tax year.
How do you register as a CIS subcontractor?
If you want to register for the CIS, you will need the following information:
- Your National Insurance number
- Your legal business name (you can also give your trading name if it is different to your legal business name)
- The UTR (unique taxpayer reference) for your business
- If you are VAT registered, you will also need your VAT registration number.
If you act as both a subcontractor and a contractor, you will need to register as both under the Construction Industry Scheme.
Registering as a sole trader
If you operate as a sole trader and already have your UTR from HMRC, you can register online. You will need your Government Gateway user ID and password – if you have ever registered for a government service such as Self Assessment, you will have these already.
If you want to register for gross payment status, you can do so at the same time.
If you don’t already have a UTR you can register as a new business for Self Assessment and HMRC will send you your UTR in the post. When registering, select the option ‘working as a subcontractor’ when prompted and you will be registered for Self Assessment and CIS at the same time.
If you prefer, you can also call and register with the CIS helpline on 0300 200 3210. Lines are open between 8am and 8pm, Monday to Friday and 8am to 4pm on Saturdays. You will need your UTR or National Insurance number to hand when you call.
Registering a different business type
If you want to register a limited company or a partnership as a CIS subcontractor, there is an online form which you need to fill in. If you are registering a partnership, HMRC will register this separately to your sole trader registration. You will need to provide your partnership UTR and trading name.
Registering if you are based abroad
If you are a subcontractor who is based abroad but does construction work in the UK, you should still register for the CIS. How you will register will depend on the nature of your business set up. Sole traders and partnerships register in the same way those based in the UK but it is slightly more complicated for limited companies based abroad and you will need a tax clearance certificate from your home country’s tax authority.
How do you get paid as a subcontractor?
To make sure you are paid correctly by your contractor, you need to give them the same business name or trading name that you gave when you registered for the CIS. If you don’t give them the exact same name, it could affect how much you get paid because if your contractor can’t verify you as a CIS subcontractor, they will need to make deductions at 30% instead of 20%
The deduction rates are usually 20% – this is the standard rate of CIS deductions. Contractors will have to make deductions at the higher rate of 30% if any of the following apply:
- They can’t verify you as a registered CIS subcontractor
- You aren’t registered as a subcontractor under the CIS
- You have given them the wrong name for your business.
Your contractor should give you monthly statements showing how much you have been paid and how much they have made in deductions. They need to provide these statements by law. You can use these statements to calculate your tax bill at the end of the tax year and work out whether you still owe any tax or National Insurance or whether you are due a tax refund.
If you apply for gross payment status, the contractor won’t make any deductions from your payments and you will be responsible for paying your own tax and National Insurance to HMRC.
Is there anything that doesn’t count as pay?
Not everything you list on your invoices will have deductions made against them. The following items don’t count towards your deductions:
- Equipment which can no longer be used (‘consumable stores’)
- Plant you have hired for the job
- Manufacturing or prefabricating materials
These will be deducted from your invoice before your contractor calculates how much needs to be deducted for payments to HMRC.
How do you pay tax and claim back deductions under the CIS?
If you are registered as a subcontractor under the CIS, you are responsible for making sure you have paid the full amount of tax and National Insurance you owe each tax year. Even if your contractor has made deductions on your behalf throughout the year, it doesn’t mean you won’t owe any further tax or National Insurance to HMRC.
To help you with your accounting, any contractors you have worked for must provide you with a monthly statement detailing the payments they have made to you and the deductions they have made on your behalf.
If you are a sole trader or partner
You need to send a Self Assessment tax return at the end of each tax year. When completing your tax return, you need to put the full amounts on your invoices as income and any deductions by contractors in the ‘CIS deductions’ field.
HMRC will then work out your tax and National Insurance bill and will take off any deductions that have already paid to HMRC on your behalf by contractors.
If you still owe tax once HMRC has calculated your tax bill for the year, you will be expected to pay that by 31st January after the end of the relevant tax year. If you are owed a refund, HMRC will pay that money back to you.
If you are a limited company
If you are a limited company and you have gross payment status, you need to declare all your income in your Corporation Tax return.
If you don’t have gross payment status and contractors have made deductions on your behalf, you need to claim them back through your limited company’s payroll scheme. If you try to claim them back through Corporation Tax you could receive a penalty from HMRC.
To claim your deductions back through your company payroll, you need to do the following:
- Send your Full Payment Submission (FPS) to HMRC. This is usually sent monthly.
- Send an Employer Payment Summary (EPS) to HMRC, entering the total amount of CIS deductions to date for that tax year.
- HMRC will then take your CIS deductions from what you owe in PAYE tax and National Insurance so you will just pay the balance by the usual date.
If your company has no PAYE bill for a period but you still have CIS deductions to claim back, you can carry these forward to the next month (or quarter) in the same tax year. You tell HMRC in your EPS that you have nothing to pay.
Your limited company needs to keep records of amounts claimed back against your PAYE bill. You can either keep your own records or use HMRC form CIS132.
If you have paid too much through your CIS deductions, HMRC will refund any you have not been able to claim back in your PAYE bill.
If your limited company goes into administration or liquidation, the person managing the administration needs to write to HMRC to request that the CIS deductions are repaid immediately.
What happens if you don’t have all the CIS statements you need?
If your contractor has not yet provided you with all of your CIS statements, you can ask them to send you replacement copies.
If your contractor stops trading and leaves you without the CIS statements you need for your accounting, you need to write to HMRC. You will need to include the following information:
- Your name and address
- Your UTR
- The name and address of the contractor
- The contractor’s tax reference if you know it – don’t worry if you don’t though
- The dates when your contractor paid you (or the relevant tax months the payments applied to)
- The reason why you don’t have statements (or duplicates) from your contractor.
This needs to be sent to HMRC at:
NIC and EO
HM Revenue and Customs
How can you get gross payment status?
If you don’t want contractors to made deductions on your behalf, you can apply for gross payment status. This means that contractors pay you in full, without making any CIS deductions, and you are then responsible for paying your full tax and National Insurance bill directly to HMRC.
If you are already registered for CIS, you just need to call the CIS helpline on 0300 200 3210 or apply online.
To apply online, you will need to use the Government Gateway user ID and password you used when you registered for CIS. Once you have logged into your tax account, go to ‘Other Services’ and then ‘Construction Industry Scheme – Subcontractors’ and you can apply from there.
Not everyone will qualify for gross payment status. To qualify you will need to show HMRC that you can be trusted to manage your own taxes. HMRC will want to see your business can pass the following tests:
- That you have always paid your tax and National Insurance on time in the past
- That your business does construction work in the UK (or provides labour for the construction industry)
- That your business is run through a bank account and not in cash.
HMRC will also look at the turnover for your business and it will have to meet one of the following thresholds:
- If you are a sole trader, your turnover needs to be at least £30,000, ignoring VAT and the cost of any materials
- For each partner in a partnership, the turnover needs to be at least £30,000, ignoring VAT and the cost of any materials or at least £100,000 for the whole partnership
- For a limited company, the turnover needs to be at least £30,000 for each company director, ignoring VAT and the cost of any materials or at least £100,000 for the whole company. If your company is controlled by 5 people or fewer, each of those 5 people must have an annual turnover of more than £30,000.
If you have gross payment status, you declare your payments as income at the end of each tax year. If you are a sole trader or partner, you will do this through your Self Assessment tax return. If you own a limited company you will use your Corporation Tax return instead.
Gross payment status and annual reviews
If you have been given gross payment status, HMRC will perform an annual review of your business to make sure you can keep the status. If you fail you might have gross payment status removed. In order to keep gross payment status, you need to ensure that you are on time with your tax returns and tax payments. For limited companies, the review is of the company as a whole rather than each individual director or shareholder.
If you fail the review
If you don’t meet all the conditions set by HMRC, you could fail the review meaning that HMRC will remove your gross payment status. You are allowed a small amount of late payments or returns before you are failed. If you are having problems paying your tax on time, contact HMRC as soon as possible. HMRC may give you more time to pay, which won’t affect your gross payment status.
If you fail, HMRC will write to you to explain that you are about to fail the review and the reasons why. If you disagree with HMRC’s decision, you can write back to them explaining why you disagree. If HMRC accept your explanation of why you shouldn’t fail, they will allow you to keep your gross payment status.
If you don’t reply, or HMRC doesn’t accept your explanation of the failings, they will write again explaining which particular conditions you haven’t met and that they will be withdrawing your gross payment status in 90 days. You have 30 days to appeal this letter if you disagree with HMRC’s decision.
You can reapply for gross payment status if you have it removed by HMRC but you will have to wait a year after the date of cancellation before you can reapply.
What changes do you need to report to HMRC?
You need to report certain changes in your circumstances to HMRC. You can report the following changes by calling the CIS helpline on 0330 200 3210:
- If you are changing from a sole trader to a partnership
- If you are leaving a partnership or company to be a sole trader
- If you are creating a new company or changing your business to a limited company.
If these apply to you, you will need to register again for CIS because you can’t transfer your old company’s registration to your new company. If you have gross payment status, you will need to reapply for this as well.
You also need to inform HMRC of any of the following changes:
- If you change your trading name or business name
- If you change your private, business or registered address
- If you stop trading
- If you add any new shareholders – you need to inform HMRC within 30 days or they may withdraw your gross payment status.
If your business goes into administration and stops trading, it can keep receiving payments for any work it has done under the CIS. It will be paid in the way it usually was, whether that was gross payment or CIS deductions.
How can DSR Tax Refunds Ltd help?
We know that working out your responsibilities as a CIS subcontractor can be really confusing – there’s so much to consider and that’s before you start sorting out how much has been deducted from your pay. Our friendly team of tax specialists at DSR Tax Refunds Ltd are on hand to help make life easier for you. We’re the experts at identifying your maximum allowable expenses so call us on 0330 122 9972 – we’re the tax experts you can trust.