The tax man (HMRC) runs “The Construction Industry Scheme (CIS)” to collect taxes from people who work in the Construction Industry as sub contractors.
In the scheme you are either a contractor or a sub contractor (subbie).
A Contractor is the person or company hiring a subbie to work for them. The subbie is not employed by the Contractor.
A subbie normally works for several contractors. Every time a subbie is paid he gets up to 30% tax deducted off the cost of the labour he is invoicing. The rate varies and is either 0%, 20% or 30%.
A builder needs a new roof put on the building he is developing. He hires a roofer to do it for £10,000 as his employees don’t have the skill set. The roofer in this case is the subbie.
Both the builder and the roofer have to register with the tax man as a contractor and a sub contractor for CIS. They can do it online. Before the builder pays the roofer he has to check that the subbie is registered (the tax man calls this “verification”). Once verified he can pay the subbie.
The builder normally has to deduct 20% of the cost of the roofers labour from the payment (so if it was a £10,000 invoice for labour then he pays the roofer £8,000 and keeps £2,000 back to pay the tax man later). Any materials supplied or charged VAT are ignored in the calculation.
When the roofer does his tax return each year he pays the tax he owes less the £2,000 already taken by the builder. Each month the Contractor should give the subbie a certificate to show what tax has been deducted. You need to keep hold of these to add up how much tax was deducted in the year.
Each month the Contractor has to submit a CIS return online to the tax man and pay over the tax deducted that month.
How much is taken off my payment?:
Firstly the tax is only deducted on the labour part of an invoice (not on materials needed to do the job or VAT). Most registered sub-contractors get 20% deducted. If you are not registered it is 30%. However, you can request “gross payment status” and so that there is no deduction.
How do I get Gross Payment Status?:
You can apply for it if you pass three tests:
1. Business test: You are working in the UK, and are mostly paid direct into your bank account.
2. How much money you invoice each year: For individuals and sole traders, you need £30,000 sales or more (excluding VAT and cost of materials). The figure is higher for partnerships and most companies.
3. Compliance test: They also look at how good you are at filing your tax returns and payments on time. If there is anything outstanding they are likely to turn your application down.
We can help you register and set up a scheme and hopefully reduce the amount taken from 30% to 20% or even to zero. Call us now to find out more.