What is CIS Tax and How Much is CIS Tax in the UK?
The Construction Industry Scheme (CIS) is a tax that was designed to increase the amount of revenue that is collected from the field of construction. Contractors must take the payment from subbies’ and transfer it to HMRC for tax purposes. Let's understand in detail.
What's the Construction Industry Scheme (CIS)?
The CIS is an HMRC scheme that applies when you are employed by contractors working in the field of construction. The CIS regulations mean contractors are generally legally required to withhold tax at 20% if you're "registered" or 30% if you're " not registered. This is distinct from self-employed persons who aren't in the construction industry. They typically receive their earnings net, meaning that no tax is taken out.
The CIS includes more than you typically consider civil and building engineering work. It includes demolition repairs, clearing sites, decorating, as well as the installation of power systems. The HMRC describes the work that is covered in the Construction Industry Scheme.
Be aware that if your company provides construction industry-related services directly to homeowners (so not to contractors) This will not be covered by the CIS and the homeowner would be liable for the cost of your services upon receipt of your invoice.
Note: The tax amount that has to be paid by the contractor varies based on whether you are registered as a subcontractor in the CIS or not.
What's CIS Tax? Example
CIS tax is not a tax that adds on. It's simply a means to ensure subcontractors are paying taxes. If we take an example where a subcontractor’s invoice totals £1,000 and the CIS tax deduction has been calculated as £150.
How Does CIS Affect Contractors?
To prevent tax fraud, contractors have to report to HMRC the subcontractors they've employed. They must also take deductions of the CIS tax and pay it to HMRC. Instead of waiting around for the subcontractor to report the correct tax at the close of the year, the contractor pays taxes to HMRC upfront. It's similar to the way employers handle payroll.
How Much is CIS Taxes in the UK?
There are currently three kinds of CIS tax rates in place. These CIS tax rates are 30%, 20%, and zero percent.
Recap of CIS Tax Rates
CIS is not an additional tax. All deductions made can be claimed back from HMRC. Most businesses will utilize the deductions made to offset tax obligations at the end of the year. Subcontractors with 20-30 percent receive less money through their agreements. But they will be liable for less tax later on.
Subcontractors that are zero percent receive the entire amount of their contracts today. They do not have any deductions that can offset their tax obligations at the end of the year (or additional taxes). It is important to note that the CIS tax rate doesn't so much affect the total tax due. However, it affects the flow of cash for the company.
CIS Tax Rates with 30 Percent Tax Deduction
Subcontractors are able to choose not to register for CIS. However, businesses that choose to not register are subject to the most significant rate of deduction, which is 30 percent. The majority of subcontractors do not want to and aren't able to pay a CIS tax of 30 percent. So they choose to register for CIS.
Every company that is regularly involved in work that is covered by CIS is required to register as a subcontractor. If you can contact Pro Tax Accountant, we can explain how you can register with the CIS as a subcontractor and what information you will need to register.
Note: When registering as a subcontractor, then the CIS tax rate will be reduced to 20%.
CIS Tax Rates with 20 Percent Tax Deduction
Subcontractors who register with HMRC are subject to tax deductions with the lesser CIS taxes of 20 percent. Subcontractors who pay tax burdens of the 20 percent tax are referred to as net subcontractors.
The majority of smaller subcontractors choose to take the CIS tax of 20 percent. The reason is that the deductions made may be utilized to reduce the tax burdens of their own or their corporate tax obligation. This is a great option for smaller businesses as they are struggling to pay the tax bill at the end of the year.
When a company expands beyond a certain amount the impact on cash flow from the CIS Tax rate of 20 percent is too much. The good news is that businesses can apply to be a gross subcontractor. They are liable for 0% CIS tax.
CIS Tax Rates With no Tax Deduction
Businesses may choose to register for the status of gross payment. Contact us to learn more about CIS and the status of gross payments. We shall provide you with complete details on who is eligible to register in order to obtain gross status and the best way to register.
A business that is recognized as a gross subcontractor receives full payments from its contractor. There aren't any deductions. This is beneficial for liquidity in the short run. However, it is essential to keep in mind that these companies need to be disciplined and set some money aside for their year-end tax obligations.