Why Do Businesses In The Construction Pay CIS?
CIS is an anti-avoidance scheme by HMRC to reduce tax fraud. CIS is not an additional tax. It is a way for HMRC to receive the tax money from sub-contractors in the form of deductions made by contractors. Your tax bill is calculated as normal and any deductions made throughout the year will be deducted from your tax bill usually resulting in a tax rebate.
There are three different types of CIS tax rates currently:
CIS 30% Tax Deduction
If a subcontractor decides not to register for CIS (very rare!) then they will suffer the higher rate of CIS tax deduction at 30%. Most subcontractors will end up registering for CIS as they cannot afford to suffer a CIS tax rate of 30%.
Once they have registered as a subcontractor under CIS then the tax deduction rate reduces to 20%.
CIS 20% Tax Deduction
Construction businesses that register as a subcontractor will suffer tax deductions at a lower rate of 20%. Once they have registered they are known as net subcontractors.
Smaller subcontractors will choose to accept the 20% CIS tax rate as the deductions suffered will be used to offset their personal liabilities (Individuals or Partnerships) or corporation tax liability (Ltd companies).
This can be particularly useful for businesses that struggle to pay their year-end tax liabilities.
However, if you are looking to grow and would like better cashflow, you should register to become a gross subcontractor as they pay 0% CIS tax (this makes you responsible for your tax liabilities).
CIS 0% Tax Deduction
Under CIS, businesses have the option to register for 0% tax deduction which is called gross payment status.
If you have registered for gross payment status you will receive the full payment from your contractor. No CIS deductions! This is great for your cashflow however you are now responsible for ensuring your tax liabilities are met, otherwise you can be caught up in penalties and fines very quickly.
If you are worried about paying for your tax liabilities you can either get yourself a good accountant or if you want to go solo, set up a separate deposit account so you can use it to save up to pay your tax liabilities.
Depending on the circumstances, subcontractors are generally in control if they want payment deductions to be made. If they decide to be unregistered a 30% CIS tax rate will apply, if they register a 20% CIS tax rate will apply (making them a net contractor) and if they want no deductions to apply they can be a gross subcontractor on 0% CIS tax.
30% subcontractor are very rare as no one wants to have deductions more than necessary! It generally happens when business owners set up by themselves without an account or if they don't fall under CIS and work they undertake rarely falls within CIS.
20% subcontractor are typically a small one man band company. There are tests that need to be met to become a gross subcontractor however we would highly recommend becoming a gross subcontractor as soon as possible! Speak to account to explain the benefits of gross CIS tax rates. If you do, this will be a massive boost to your cashflow.
0% subcontractor (highly recommended!) requires to be applied for. This is called Gross Payment Status. You will no longer have deductions made from contractors and this means you now have 20% extra in cashflow to fund business activities (be careful with your end of the year tax bill as you will have one now!)
For further information take a look at our CIS Resource Hub for all your CIS needs! If you need any extra support feel free to reach out to us.
This article was written for Construction Insider and Saint Financial Group. Saint is a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.
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