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If you're working as your own boss in construction or taking on subcontractors for a project, you've got to get up-close and personal with the Construction Industry Scheme (CIS). It's not the most popular set of rules in the building game, but it's a set you need to play by – unless you want to lose a very large chunk of your earnings. Here are the basics of CIS to get a feel for what you're dealing with.
CIS is a special set of tax rules for self-employed people in the building trade. Normally, when you file your own tax returns through Self Assessment, you get your pay with no tax deducted at source. As a construction subcontractor, however, the rules you follow are a little different. Under CIS, your contractor hacks off 20% of your pay before they fork it over.
CIS covers most kinds of building work done in the UK. Site preparation, construction and dismantling, repairs and decorations are all included in the scheme, for example. Even businesses based outside the UK get caught up in the CIS system, if they do work in the country. It makes no difference if you're a contractor, a subcontractor or both. You'll still need to deal with CIS from one side or the other.
It all boils down to HMRC getting bent out of shape in dealing with tax fraud in the building trade. Basically, they decided there was too much dodgy “cash in hand” nonsense going on in construction and clamped down on it hard. The way they went about it means that your contractor coughs up a chunk of tax to HMRC directly, taking it out of your pay. It's like making an advance payment against the tax you'll owe, designed to make it harder for subbies to wriggle out of paying up. It's not super-popular, obviously, and can leave you badly in the lurch if it goes sideways. Even so, the taxman reckons it's worth the hassle if it chokes off the tax evaders.
People in construction tend to throw these terms around a bit in general conversation, but the CIS system draws some pretty sharp lines between them:
A lot of the time, you can end up being both a contractor and a subbie at once. For instance, this can happen if a business is contracted to do some building work, but then pays someone else to do some of it. At that point, you're getting 20% of your pay sent to the taxman by your contractor, and also sending him 20% of your own subcontractors' cash. It can get messy at times, so you're probably best off getting some expert advice if you're not 100% sure where you stand.
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If you're a construction contractor, you need to register for CIS. The same goes for subcontractors who work for themselves, have their own Limited Companies or are in a partnership or trust.
As for how you do it, step one is to jump on the HMRC website and sign up online. You'll need to have an account to sign into and your Unique Taxpayer Reference (UTR) number to hand. The actual forms you'll have to fill in depend on your business set-up (Sole Trader, Limited Company or whatever), but it should all be pretty straightforward. If you're new to the self-employment game and need to get set up, you can do that on the website as well. There's even a CIS helpline you can call if you need someone to walk you through it all.
Generally speaking, if you don't register for CIS when you're supposed to, you can expect to see a full 30% of your wages vanish into HMRC's pockets before you get them! There's a chance you might be able to apply for what they call “gross payment status”, but the rules are sticky so don't count on it. If you do qualify, then you won't lose any of your pay through CIS deductions, but you'll still have to pay tax normally through Self Assessment and/or or the Corporation Tax system.
Apart from the fact that you're paying tax on money you haven't been given yet, there are a few pitfalls and dangers lurking in the CIS system. For one thing, since you're paying tax from the very first penny you earn, there's a chance you might not be getting the full benefit of your tax-free Personal Allowance. That's one of the reasons why it's so important to get your Self Assessment tax returns right. There's a section in there to list all the CIS deductions you've had taken from your pay.
Beyond that, there's obviously the very big danger of failing to get registered for CIS on time – or at all. That can easily see you losing 30% of your pay instead of the normal 20%. It's an easier mistake to make than you'd think, too. A lot of people get into trouble each year because they don't properly understand their employment status, and there's some seriously bad advice floating around out there. You might also be getting bad information from somewhere on how much to claim when you sort out your CIS tax return, which can lead to major hassle from HMRC when they catch up to you - which they eventually will.
If you're on both sides of the fence as a contractor and subcontractor, working with CIS can be a strain on your cash flow. As we mentioned before, you'll be losing 20% of your pay – which is cash you probably need to pay your own subbies. Planning is the key here.
Finally, you've got to watch out for the double taxation trap. If you don't send in your Self Assessment tax return on time, you can end up getting an estimated tax bill from HMRC. With CIS muddying the waters, it's not hard to find yourself getting a bill from HMRC when you've already paid your deductions. It's not usually too difficult to set things straight by getting the taxman the information he needs, but it's definitely a nasty situation to be in while it lasts.
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Construction and other site workers like joiners, builders, plumbers, or groundworkers using the Construction Industry Scheme (CIS) can claim subcontractor tax rebates for travel expenses to temporary sites. The average annual rebate for CIS workers is £2,000. RIFT will show you how to claim CIS tax back and take care of everything for you. If you need to file a CIS tax return, we'll take care of that too. Just click on the green button below to get started.
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