What Is The Construction Industry Scheme? (CIS)
The Construction Industry Scheme (CIS) affects businesses in the construction industry and was set up by HMRC to reduce tax fraud within the industry as HMRC believe it was too easy for subcontractors to not declare the earnings.
Now contractors will deduct CIS tax from subcontractors and pay this to HMRC on their behalf. This has resulted in additional admin for construction owners and for those who are trying to manage this themselves we hope the content on Construction Insider will make your task that little bit easier!
What Is CIS Tax?
CIS is not an additional tax for contractors or subcontractors, it is simply a way of HMRC ensuring they are receiving their tax money by making contractors deduct CIS tax deductions before paying the subcontractor.
For example, if a subcontractors invoice is £2,000 and the CIS tax deduction is £400 then the contractor will pay £1,600 to the subcontractor and £400 to HMRC.
If you are a subcontractor, don’t worry as you haven’t just lost £400! The £400 will be used to offset against any tax you may owe to HMRC when you complete your year-end accounts.
In many cases, subcontractors receive a tax refund from HMRC.
How Does This Effect Contractors?
As mentioned above, the biggest issue is the time needed to be spent to manage CIS. HMRC introduced CIS to reduce tax fraud so contractors now have to report to HMRC the subcontractors they have used, materials and labours costs and CIS being deducted. The contractors is passing the subcontractors tax to HMRC effectively upfront.
It is very similar in how you would manage your payroll. You are effectively giving your subcontractors their net pay after you have paid their taxes to HMRC.
How Does This Effect Subcontractors?
As a subcontractor, your tax is being paid over to HMRC meaning you will now receive a lower amount from your contractor. This deduction is used against your end of year tax bill so you are basically paying off your tax over the year.
This has a big impact on your cashflow as you are now receiving 20% less of the income you should have been! We highly recommend applying for gross rated so you can keep this additional 20% and pay your tax bill yourself at the year end.
Conclusion to what is CIS tax?
CIS tax is an additional burden on contractors and subcontractors and is seen by HMRC as a anti-avoidance measure to ensure they receive the tax they should be. CIS is constantly changing so a good accountant will be worth their weight in gold for you. To find out more about CIS see our CIS Knowledge Hub here.
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.
Saint provides the luxury of free business consultancy for all of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!