If you are self-employed or a contractor working in the construction industry it is very likely you are well aware of the Construction Industry Scheme or CIS.
Under this scheme contractors deduct CIS from subcontractors and pay it to HM Revenue & Customs (HMRC) on the subcontractor’s behalf. This tax is paid in advance towards the subcontractor’s income tax and national insurance.
Unless you are paid “Gross Status” you will have CIS tax deducted directly from your income by the business you contract to. As standard, the CIS tax deduction for verified subcontractors is 20%, however if that sounds like HMRC’s taking a huge lump out of your pay, then consider the alternative; If you don’t register for the scheme and aren’t verified the amount deducted would be 30%!
If you are a subcontractor why is it likely you are due a CIS tax refund?
The reason it is likely you are entitled to a tax refund is that you pay 20% tax at source on your income, which doesn’t factor for the personal tax free allowance. Also, your tax should be based on your profit, not your income, which means there might be legitimate business expenses you could offset against your profit in order to lower your tax liability and maximise the value of your CIS tax refund.
Because of this, at the end of the working year when you file your self-assessment tax return, you’ve probably been overcharged. Basically, the tax taken from your income during the year is probably higher than the amount you actually owe. Hence why you get a CIS tax refund.
Top Tips to maximise your CIS tax repayment
1. CIS vouchers – Ensure you have received CIS deduction statements from all the contractors you have done work for during the tax year. Without them you can’t be certain the contractor has deducted tax correctly and what tax has been paid on your behalf to HMRC.
2. Don’t forget your personal allowance – The personal allowance is the amount you can earn each tax year tax free. The tax free personal allowance in the year to 5 April 2017 was £11,000.
3. Business expenses – Ensure you claim for any legitimate business expenses which may include expenses such as materials, telephone costs, hand tools, workwear etc.
4. Motor expenses/Mileage – Although the rules for claiming motor expenses or mileage can be technical, claiming legitimate allowable motor expenses will maximise your CIS tax refund.
5. Claim capital allowances – If you have purchased tools, equipment, machinery, vans etc. which are used for work you can claim capital allowances which will increase your CIS tax refund.
Gross Payment Status
If your business has CIS tax deducted from its income this can be bad for cash flow. You can “opt-out” from CIS tax being deducted from your income if HMRC agree. This is when a business is deemed “Gross Payment Status” where no CIS deductions are taken from your income.
Your business will qualify for Gross Payment Status if it can show HMRC that it passes the following tests. You’ll need to show that:
- you’ve paid your tax and National Insurance on time in the past
- your business does construction work (or provides labour for it) in the UK
- your business is run through a bank account
HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:
- £30,000 if you’re a sole trader
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership
- £30,000 for each director of a company, or at least £100,000 for the whole company
Many construction workers and businesses prepare and file their own CIS tax returns. There’s nothing at all wrong with this, if you understand the rules. However, if you want reassurance that you have the correct CIS tax refund then we can help.
If you would like us to prepare your accounts, self-assessment tax return and maximise your CIS tax refund, do not hesitate to give us a call on 01228 904 904.
