CIS is a tax deduction scheme which involves tax deducted at source from payments which relate to the construction work. It applies to the payments made by the contractors and the subcontractors. It will not apply to employees whose tax are deducted at source under another PAYE another tax deduction scheme.
The contractor must always register itself with HMRC under CIS scheme. Under CIS, the contractor will deduct tax at source on any payments it makes to the subcontractor, the rate at which the tax will be deducted will depend on the registration status of the subcontractor.
It is not an obligation for the subcontractor to register under CIS, however if it does register with HMRC and passes the 1. Business 2. Turnover and 3. compliance test it will receive gross payments from the contractor. If the subcontractor fails one of the 3 eligibility tests it can still register with HMRC. In that case the tax will be deducted from the payments made (excluding VAT charged by the subcontractor and the cost of material) at 20% instead of a higher rate of 30%.
If tax is deducted, then a subcontractor which is a partnership or sole trader can treat this tax as income tax on profits. If the subcontractor is a company, the tax deducted can be treated as satisfying relevant liabilities which are amounts due to HMRC in respect of that company's obligations as an employer - for example, PAYE or National Insurance Contributions
Am I a subcontractor?
You are a subcontractor if you carry out construction work for a contractor. You can be an individual/sole trader, partnership or a company.
Do I pass the 3 tests to be eligible to register under CIS?
Business test: Whatever your structure is you must be carrying out construction work in the UK and business must be run mainly through the bank account.
1. for an individual/sole trader: turnover from construction work must be at least £30,000.
2. for a partnership: the payments the partnership receives under contracts relating to construction operations minus the cost of materials, must not be less than the lower of £200,000 and the multiple turnover threshold. (The multiple turnover threshold is the sum of each individual in the partnership multiplied by £30,000, plus the sum of the threshold each company in the partnership would obtain if that company were applying on its own behalf).
3. for a company: a company's threshold is the lower of £200,000 and the amount calculated by multiplying the number of directors by £30,000. If the company is a close company for tax purposes – one with fewer than five controlling parties – that company's threshold is the lower of £200,000 and the amount calculated by multiplying the number of shareholders by £30,000.
Compliance Test: the sole trader/ company/ a person in the partnership
must have complied with all tax obligations in relation to income tax or corporation tax. This will include Self-assessment tax return, NIC etc.
If you are a subcontractor, pass the above tests and register with HMRC under CIS scheme you are in a beneficial position.
For Further information on how to register for CIS and related taxation advise please contact Taxaccolega by phone on 02081270728 or email at email@example.com.