Construction Industry Scheme (CIS) Tax Refunds

CIS: Sub-contractor Tax in the construction industry

The Construction Industry Scheme, CIS, details payments for sub-contractors from contractors. As the name suggests, it is only applicable in the construction industry. When a contractors needs work from a different skills set (like an electrician, plasterer or plumber), the person(s) they ask to complete the work will be a sub-contractor.

The rules as to what qualifies as construction are complex and it worth seeking professional advice to ensure you are not over paying tax. If you are a sub-contractor in construction, you need register under CIS and be registered as self-employed.

As the contractor gets a sum of money for the work as an entirety, it is the contractor who is responsible for paying the sub-contractor. As it is a service based position, income tax and NI contribution are taken off the wage of the sub-contractor by the contractor and paid to HMRC at a rate of 20% of the total pay.

The tax year for any sub-contractor or self-employed persons is 6th April until 5th April the following year. During this time, all gross pay and deductions will be added together to work out a total pay. Then the profit for the sub-contractor will be worked out after deducting cost of materials and then any other business expenses such as training, travel or phone bills from the income.

If, at the end of the year, the contractor is below the personal allowance threshold (£9,440 for the year ending 2014, going up to £10,000 for the year ending 2015) they will not have to pay any tax. Therefore any tax paid by contractors to HMRC out of the sub-contractors pay will be refundable. See below example for Mr J Bloggs, a plasterer:

• Total Gross Income for Mr J Bloggs for year ending 5th April 2014: £12,000
• Total CIS deductions (tax and NI)  for the same period: £2,400
• Cost for materials and business expenses for the year: £5,900
• Profit for the year for Mr J Bloggs: £12,000-£5,900 = £6100

As we can see, the profit for the year is below the personal allowance for the year ending 2014 (£9,440). Therefore, Mr J Bloggs should not have paid any CIS deductions so he is able to reclaim the £2,400 from HMRC at the end of the year. See below example for Mrs J Smith, an electrician, when the profit for the year is above the personal allowance:

• Total Gross Income for Mrs J Smith for year ending 5th April 2014: £22,000
• Total CIS deductions paid for the same period: £4,400
• Cost for materials and business expenses for the year: £7,200
• Profit for the year for Mrs J Smith, £22,000-£7,200 = £14,800

In the above example, the profit for the year is above the personal allowance by £5,360. Therefore tax paid should equal 20% of £5,360, which is £1,072. However, we have paid £4,400 from CIS Tax deductions. This means that Mrs J Smith is eligible for a Tax refund of £3,328.

The same tax rules apply for sub-contractors and self-employed persons as those in employment meaning when you hit the upper threshold (£41,450 in the year ended 2014 rising to £41,865 for the year ending 2015) you will have to pay 40% tax on that amount. The summary is below, using the 2015 figures:

• No tax is paid on your first £10,000 earnings in the year
• 20% tax is paid on the next £31,865 of earnings (between £10,000 and £41,865)
• 40% tax is paid on any income exceeding £41,865

To try to make the above simpler, we will look at how much tax should be paid by Mrs O McKenzie who had an income (profit) for the year of £55,000:

• No tax is paid on her first £10,000 of income
• ·20% tax is paid on her next £31,865 of earnings meaning £6,373 tax payable
• 40% tax paid on her remaining £13,135 of earnings over the upper threshold meaning £5,254 tax payable
• Total amount of Income Tax payable is £11,627.

If all of her income came from sub-contracting, the amount of CIS Tax already paid would be 20% of £55,000 which is £11,000. She is due to pay £11,627 so she would have to pay HMRC an extra £627 to avoid a potential fine in the future for Tax Evasion. This profit figure is very high so most sub-contractors who register under the CIS as self-employed will get a tax refund. It is advisable that if you qualify for this scheme, you do so as it will more often than not result in you getting money back from HMRC at the end of the tax year.

There are also National Insurance (NI) contributions that need to be paid. These are more complicated as the amount you pay will vary with the amount of profit you have at the end of the year. There are different classes and different personal allowances depending upon what type status of employment you have and what your level of income is. It is worth seeking a professionals help at this point to ensure you do not make a mistake and pay the wrong amount.

If you are still confused, or think that you should get a refund, and want to know what the next step is, get in contact with us here at Tax Affinity. Use any of the contact details on the website and we will gladly assist you on the next stage.

By Owen Cain at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Kingston upon Thames they are considered to be experts in all types of Accounting and Tax issues. Helping and supporting businesses and individuals throughout the UK.

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