The Construction Industry Scheme (CIS) sets out special tax rules for contractors and subcontractors involved in construction work. Continue reading to discover why you should consider a CIS-registered limited company for your construction career.
How does CIS work?
The Construction Industry Scheme (CIS) is a taxation scheme for individuals and businesses, including limited companies, working within the construction industry. CIS sets out the rules for how self-employed construction workers pay tax. Under the CIS, tax is deducted at source from payments relating to construction work. The contractor is required to deduct tax on any payments made to a subcontractor. The rate at which tax is applied will depend on the registration status of the subcontractor.
The deductions are advance payments towards the subcontractor’s tax and national insurance for the particular tax year. Contractors are required to register for the scheme, but subcontractors can choose whether or not to register. Please be aware that if you are a subcontractor and haven’t registered for CIS, deductions will be taken at a higher rate from your payments. Please visit the government’s website to find out if you should register for CIS.
What happens when you register for CIS?
If you register for CIS, the contractor will deduct tax at 20% of your invoices. If your invoice includes direct expenses such as for tool hire or materials, then tax should not be withheld from these amounts, as you should be paid 100% of these costs. The contractor will then pay the 20% deduction to HMRC. You will receive the remaining 80% of the invoice, which is paid directly to you, along with the total amount for additional costs, such as materials.
There are many advantages of having a CIS-registered limited company. Continue reading to discover our top three reasons you should consider registering for CIS and how it would benefit your construction career.
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You can apply for gross payment status
If you register for the CIS and your tax affairs are up-to-date, you can apply for gross payment status. This means contractors will pay you the total amount of your invoice without deductions. You’ll pay all your tax and national insurance at the end of the tax year when you submit a self-assessment tax return. Being paid the total amount of your invoice is beneficial as it gives you more control over your limited company finances. You can apply for gross payment status at the same time as registering for CIS as a subcontractor.
To qualify for gross payment status, you’ll need to prove the following:
- You’ve previously paid all taxes and national insurance on time
- Your business does construction work (or provides labour for it) in the UK
- You have a business bank account which your business is run through
HMRC will also consider your turnover for the last 12 months, excluding VAT and the cost of materials. Your turnover must be at least:
- £30,000 if you’re a sole trader
- £30,000 for each partner if you are in a partnership or at least £100,000 for the whole partnership
- £30,000 for each director of a company or at least £100,000 for the whole company
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You can claim expenses
When you set up a CIS-registered limited company and operate outside IR35, it is possible to claim back the cost of certain allowable business expenses. When calculating the amount of tax and national insurance due on your tax return, you can offset any legitimate expenses incurred ‘wholly and exclusively’ for your business, such as tools, van expenses, administrative costs and materials. Keeping a record and receipt of every expenditure is vital as you may be asked to provide evidence to HMRC.
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You can register for the VAT Flat Rate Scheme
It is important to note that if you are VAT registered, CIS deductions are not withheld on the VAT element of your invoice. If your annual VAT turnover is £150,000 or less (excluding VAT), you can apply to HMRC’s Flat Rate Scheme. With the Flat Rate Scheme, you can:
- Pay a fixed rate of VAT to HMRC
- Keep the difference between what you charge your customers and pay to HMRC
- You cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000
Additionally, under the Flat Rate Scheme, you can get a 1% reduction in flat rate percentage if you’re in your first year of VAT registration. This means you can take 1% off the flat rate you apply to your turnover for the first year.
Contact Fusion Business Services today
Fusion Business Services specialist CIS accountancy service allows you to run your business efficiently. Our expert team will assist you with your administration, PAYE and Corporation Tax, CIS registration forms, VAT registration and Company Incorporation where applicable.
To find out more about our CIS limited accountancy service, please call our friendly team on 0800 2294020 or complete the short form on our website.
