Contractors registered under the Construction Industry Scheme (CIS) are required to deduct the following tax from their payments to subcontractors:
- 20% deduction (if the subcontractor is registered for CIS); or
- 30% deduction (if the subcontractor isn’t registered for CIS).
These deductions are paid by the contractor to HMRC as an advance towards the subcontractor’s tax liabilities.
Alternatively, the subcontractor can apply for gross payment status. This means contractors will pay you (or your limited company) in full, without deductions.
If you’re a CIS subcontractor working through your limited company, any CIS deductions made by a contractor from income due to the company can be offset against the company’s Corporation Tax liability, or refunded directly to the subcontractor by HMRC after the end of the tax year.
The position is the same if you’re a sole trader, but in this situation, any CIS deductions taken from you as a subcontractor are offset against your Personal Tax liability and will be picked up in your annual Self Assessment.
You also need to be aware of the impact of the government’s IR35 legislation (also known as ‘off payroll working’) on your assignment. If you are a contractor or subcontractor and your assignment is affected by IR35, then these rules take precedence over any CIS rules.
How is CIS affected by IR35?
IR35 is a tax law introduced to combat tax avoidance by workers supplying their services to clients via an 'intermediary' (such as a limited company) who would otherwise be an employee. It does not usually apply to anyone working as a sole trader business who pays Income Tax and National Insurance through the annual Self Assessment process.
IR35 rules around employment status do, however, apply where the sole trader works on a contract basis for an end-client in a way which could be deemed to an employee/employer relationship based on the day to day working practices. In this situation, the end-client would be regarded as the employer of the worker (sole trader) and liable for any unpaid employment taxes.
As you can see, it's an enormously complex area but Crunch are IR35 experts with over ten years of experience in accounting and tax matters that affect contractors, sole traders and small businesses. We’ve built an IR35 Hub with a wealth of content, guides and videos on the subject. We’ve also developed an IR35 calculator tool for contractors to understand whether they’re affected. It can also help businesses who use contractors themselves, showing them whether they need to treat their contractors as inside IR35 and deduct employment taxes.
Worked example to show how CIS works
The relationships between these transactions are complex, and we’ve broken them down into various situations you may come across.
CIS where your limited company (or you as a sole trader) is the subcontractor only
You work for a contractor who pays you or your limited company (as a CIS subcontractor) and deducts either 20% or 30% for CIS payments. You or your company does not employ any subcontractors as part of this arrangement.The main contractor must file a monthly report to HMRC showing the deductions made from all its subcontractors, including your limited company (or you if you’re a sole trader).
For limited companies: Your limited company will then include the CIS amount deducted by the contractor through an Employment Payment Summary (EPS). Your company must submit an EPS to HMRC throughout the tax year as part of its PAYE arrangements.
Once the tax year has ended and the Final Payroll Submission (FPS) has been made, your limited company can complete an online form using your government gateway account. HMRC will then use the total amount of CIS deductions made by the contractor(s) you worked for to reduce your company’s Corporation Tax liability. If there’s any CIS credit left over, this will be refunded to your company.
For sole traders: If you’re a sole trader then you should include the CIS amount deducted by the contractor(s) throughout the year on your annual Self Assessment and this will reduce your personal tax bill. Again, if there’s any CIS credit left over, this will be refunded to you.
Your limited company is paying subcontractors
Your limited company is paying subcontractors to do work. None of the work is for another contractor.Your company must complete a monthly report to HMRC providing certain information, including the amount of CIS deducted from your subcontractors. The report needs to be made for all individuals and businesses you employ as CIS subcontractors.Your limited company pays all the deductions made over to HMRC in the same way as other PAYE taxes are paid.
You employ subcontractors but you’re a sole trader
You work as a sole trader, but on some or all of your jobs you pay subcontractors to do work. None of the work is for another contractor.
Even though you don’t need to run payroll to pay yourself as a sole trader, if you pay subcontractors you’ll need to run CIS payroll for them and complete a monthly report to HMRC providing certain information, including the amount of CIS deducted from your subcontractors. The report needs to be made for all individuals and businesses you employ as CIS subcontractors.
You will need to pay all the deductions made over to HMRC as other PAYE taxes are paid.
You or your limited company is working for a contractor and is also paying subcontractors
You or your limited company provides services to a contractor, and also uses subcontractors.
In this situation, you’ll need to combine the two previous scenarios:
- The contractor will make the necessary CIS deductions from its payments to your limited company
- Your limited company will make the necessary CIS deductions from the payments it makes to its subcontractors
- The amount your limited company is due from, or is due to pay to HMRC will be the difference between these amounts.
If you’re operating as a sole trader then the situation is the same but as in the previous point you’ll need to make sure you operate CIS payroll for any of your subcontractors.
The position is summarised below.
What about the VAT reverse charge?
On 1st March 2021, VAT reverse charge rules were introduced. These rules change the way VAT-registered businesses, also registered under CIS, present their invoices. If you’d like to learn more about the VAT reverse charge and the impact it may have on you, check out the details in our comprehensive “What is VAT reverse charge in the construction sector?” article.
How can Crunch help?
Crunch has a CIS service which has been designed to streamline the whole process for contractors and subcontractors working in the construction industry. Just sign up, send us your information every month and we’ll take care of the rest. Find out more about the Crunch CIS scheme.