As a self-employed worker in the construction industry, a percentage of your earnings will be withheld at source by the contractor you’re working for.
This money goes to the HMRC as advance payments towards your tax and National Insurance obligations. The contractor will send this money directly to HMRC – it will be either 20% or 30% of your gross pay depending on your CIS registration status.
Due to its advance payment model, the CIS frequently leaves sub-contractors over-paying on tax throughout the year, and in line for a tax refund come year-end.
In this brief guide we’ll explain how self-employed sub-contractors can claim a tax rebate under the CIS.
What is the CIS?
The CIS is in place to ensure that self-employed subcontractors in the construction industry pay the correct amount of tax. Under the CIS, contractors who hire independent tradespeople to help them on a job must withhold a portion of their wage in order to pay it to HMRC instead of the Pay As You Earn model that traditional employees pay tax under.
How much tax do I pay under the CIS?
As a self-employed subcontractor, you have the choice to register under the CIS. If you do register, your tax will be withheld by the contractor at a rate of 20% on every job you do throughout the year.
If you choose not to register, you will be taxed at 30%.
How do I know if I am eligible for a refund under the CIS?
If you don’t have gross payment status, it’s likely you’ll be due a tax refund from HMRC at the end of the tax year.
You may have an idea of whether you’re due a refund by tracking your earnings and the percentage deducted over the year, but you won’t know exactly how much until it’s time to complete your annual Self-Assessment tax return. When you complete your Self-Assessment, you’ll receive a calculation of how much tax and National Insurance you need to pay, with allowable business expenses and personal allowances deducted. Any amount your contractors have taken above this figure will be your rebate.
How can I claim my tax refund under the CIS?
Claiming your tax rebate under the CIS is relatively straightforward. If you’ve already registered for CIS, you should:
- Complete your annual Self-Assessment tax return before the 31st January deadline
- Include details of all your income and expenses from your work, such as materials and tool hire, as a self-employed subcontractor
- Include details of the tax you have had deducted by contractors under the CIS
The HMRC will then calculate the refund you’re due and send any refund due directly to your account. If you have your tax affairs handled by an accountant, they will either charge an upfront fee or receive a commission from your refund total.
It’s better to go with an accountant who will charge a fixed fee for assisting you with your Self-Assessment and CIS submission. Those who charge a percentage of your final refund may end up taking a lot more than you expected – with a flat fee there are no nasty surprises.
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How do I pay tax under CIS myself?
There is a way to pay the tax you owe at the end of the year with your Self-Assessment instead of having tax withheld at source by a contractor.
To pay tax yourself under CIS you need what’s called ‘gross payment status’. This enables you to receive your earnings in full from the contractor you’re working for, without any deductions for tax.
You can apply for gross payment status when you first register as a subcontractor under the CIS. You can also apply for it later on.
HMRC do have some strict rules surrounding who is eligible for gross payment status.
They’ll check for the following:
- At least a £30,000 turnover (pre-VAT and materials) for sole traders, and at least £30,000 for each individual and £100,000 in total for partnerships and limited companies.
- A record of paying tax and National Insurance contributions on time
- Evidence of business transactions in a UK bank account
- Proof that you’re engaged in construction work in the UK
To register for gross payment status, fill in the on-screen form available on the GOV.UK website. There are different forms available depending on whether you’re a sole trader, in a business partnership or the director of a limited company.
Do I need an accountant to file my CIS tax refund claim?
You don’t need an accountant to do it for you, as it’s possible to claim CIS tax owed to you via your annual Self-Assessment tax return.
However, CIS tax can get pretty complex. For example, new rules came into force in 2021 which changed the way contractors make deductions for materials, which aim to restrict them to a contractor and subcontractor working on a specific contract.
There are different considerations if you’re a subcontractor trading as a limited company, too. In such cases, you may be able to offset your CIS tax requirements against corporation tax liability. So HMRC can deduct the amount they owe you as a repayment from your corporation tax bill.
Further, if you’re VAT registered, CIS tax reporting has further complications. Recent changes mean that under certain conditions, a ‘reverse charge’ is in place so that instead of a CIS-registered subcontractor charging VAT on their invoices, the contractor themselves accounts for VAT on their own VAT return. This can impact cash flow, so it’s important to understand these changes.
Also, there are various things which are considered by HMRC as allowable expenses that some CIS subcontractors may not know about, such as travel expenses for business journeys – causing them to lose out financially by not declaring them.
If you’re in any doubt about your own circumstances and liability, it’s always recommended to get the advice of a tax professional.
How long does it take to receive my CIS tax refund?
The exact timeframes vary, but HMRC says to contact them if you’ve been waiting 40 days without receiving your refund. Usually, though, turnaround is more rapid with claims being processed in around two weeks.
If there are any errors or inconsistencies in your claim – it can take considerably longer while HMRC unpick it – another reason to leave it to a professional. QAccounting work with Rhino Trade which offers unbeatable prices on this type of work. Have a look at our CIS offering today!
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Extracted from the ACCA Guide to the Autumn Statement 2022
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