Under the Construction Industry Scheme (CIS), contractors must deduct tax from any payments they make to subcontractors. Any such deduction is then passed onto HM Revenue and Customs (HMRC). These deductions are then counted as payment towards a subcontractor’s Tax and National Insurance contributions.
The size of deductions vary depending on the individual situation of the subcontractor in question – there is a 20% deduction for subcontractors registered for CIS and a 30% deduction for subcontractors not registered. As the contractor, it is your responsibility to pay these deductions to HMRC – with any such deductions classed as an advance payment towards the subcontractor’s year-end tax liability. Furthermore, if you are a CIS subcontractor operating through your own Limited Company, any such CIS deductions are offset through your company’s Corporation Tax liability or else refunded straight to the subcontractor by HMRC at the end of the tax year.
There are various factors that influence CIS returns, and as such it can be easy to feel quite lost, especially if you are a new business. To help clarify the situation and enable you to make the best decision for your business, we have put together the following guide:
Your limited company serves as a subcontractor
If you are working for a contractor that is paying your Limited Company, then after CIS payments are deducted, the contractor in question must report these payments to HMRC – including any and all deductions made. Following this, your Limited Company must then include all such CIS deductions in your Employment Payment Summary (EPS) that your company submits to HMRC every that tax year as part of your company’s PAYE arrangement.
Once this is all done, at the end of the tax year, HMRC will use the total CIS deductions made by any and all such contractors to calculate how much Corporation Tax your company is required to pay. Of course, this applies both ways, meaning that any outstanding credit that is outstanding after such calculations are made will also be refunded back to your company through the normal channels.
Your limited company pays subcontractors
If your company is paying subcontractors for work, you are legally required to submit monthly reports to HMRC declaring such work. These reports must include various details regarding these transactions, including how much CIS has been deducted from these subcontractors. These reports must be made for every CIS subcontractor your Limited Company works with, regardless of whether they are a business or individual. You are required to pay all such deductions to HMRC in exactly the same way as PAYE taxes are made.
Your limited company works for subcontractors and contractors
If your company is involved with both subcontractors and contractors, you will be required to combine the two. In such a situation, the contractor will make their required CIS deductions from whatever payments they make to your company, while in turn your company will make all required CIS deductions from what you pay your subcontractors. If after this has been calculated there is a positive difference between these two sets of figures, you will be required to pay this difference to HMRC. Likewise, if the difference between these payments is negative, you will be eligible to reclaim this back from HMRC. Because of this, it is very important that you keep accurate, up-to-date records so that you do not under or overestimate these figures and suddenly find yourself with a large bill to pay at the end of the tax year.
The importance of keeping detailed CIS records
As you can imagine, it is important that you keep accurate, up-to-date records of all CIS so that you can supply these to HMRC if required. This will include records of the wages you have paid and to whom – including their personal details, such as name, address and their Unique Taxpayer Reference number. Problems can arise if there are gaps in your records, which if unsolved can then lead to complications with HMRC, including the real threat of large monetary fines. You can avoid this by making such record keeping a normal part of your admin process, as well as seeking the advice of a qualified accountant when needed.
Report any changes
When operating a business, it is common and expected that your situation will change over time. Whilst this is of course perfectly acceptable, it is crucial that you notify HMRC immediately of any changes to your operations that may affect your operations. Such changes can include:
- You change your business address or your home address
- The structure of your business has altered, such as moving from operating as a Sole Trader to that of a Limited Company
- A contractor you work with passes away
- You take on another contractor’s business – regardless of the time period involved
Furthermore, if you cease trading or stop working with subcontractors, you must inform HMRC and stop filing CIS reports to them. Even if you are only stopping working with subcontractors temporarily, you must inform HMRC of this.
As you can see, there are numerous factors that you must take into account when operating as a Limited Company, particularly when dealing with contractors and subcontractors. You must be very clear in what kind of relationship you and your business have with such 3rd parties in order to avoid any problems with HMRC. As with all such issues relating to tax, you are advised to seek the advice of a qualified accountant who can help make sure you avoid any pitfalls and employ the best use of the tax you pay – particularly regarding the specific industry you operate in – and here at Quant Accountants we are well-placed to help you.