Here is our concise guide to being a sub-contractor.
What is a sub-contractor?
If your business (whether a sole-trader, partnership or limited company) provides labour in construction projects to other businesses, your business will become a “sub-contractor.” This means your customer, known as the contractor, is obliged to deduct 20% tax from labour payments made to you. The contractor pays this tax to the Revenue on your behalf. The system is referred to as the “construction industry scheme” or CIS for short.
Employee vs. sub-contractor
The law defines when someone is an employee, or when they are self-employed and thus a sub-contractor in the construction industry. It is cheaper to engage sub-contractors rather than employees (in terms of National Insurance and holiday pay) and there are fewer legal obligations to sub-contractors than there are to employees. However, contractors should not arbitrarily decide their labourers are sub-contractors. If the nature of the relationship shows the labourers are employees rather than sub-contractors, the employer (not the employee/sub-contractor) will be responsible for paying the shortfall of tax and National Insurance to the Revenue.
How do I become a sub-contractor?
Before accepting work as a sub-contractor, you should first register your business as a sub-contractor by phoning the CIS helpline. (You will already need to be registered as a business before applying for sub-contractor status.) You will need the business’ unique tax reference (UTR) and – if you’re a sole-trader – your national insurance number.
How much tax is deducted from my earnings?
Your contractor will ask for your 10-digit UTR and national insurance number so they can “verify” you with the Revenue. If they cannot verify you, they are obliged to deduct 30% tax rather than 20%.
The tax is only deducted off your labour charge. If your contractor reimburses you for materials and other expenses, they should not deduct tax off these. If you are VAT registered, the contractor deducts tax off the “net” labour fee before VAT is added.
How do I get the tax back?
If you are a sole-trader or in a partnership, the tax deducted is taken into account when your personal tax return is prepared. Many sole-traders and partnerships (if all or almost all their trade is under CIS) are due a tax refund at the end of the tax year.
If you are trading in a limited company, the system works differently. The CIS tax you suffer can be offset against any tax and/or PAYE/NI you are deducting from any sub-contractors and/or employees you engage. The tax deducted by your contractors is not set off against your corporation tax bill at the end of the year. The Revenue will expect the corporation tax to be paid on time regardless of whether they’ve yet refunded you the CIS tax. It is, therefore, essential to file accurate and timely CIS returns with the Revenue to facilitate a speedy refund of CIS tax. At the end of the tax year – not the accounts year – you should apply for a refund as soon as possible
How can I avoid losing 20% of my income in tax?
Whether a limited company, partnership or sole trader, it is possible to apply for “gross status” with the Revenue which means no tax is deducted. Since this will mean your business will owe the Revenue money, rather than the Revenue owing your business money, they will only grant gross status if your track record shows you pay your taxes on time.
If you require any support or advice regarding your CIS, please feel to contact Southside Accountants in Wimbledon & London we would be happy to help.