We recently announced that Coconut now supports subcontractors on the Construction Industry Scheme. This means it’s now easier than ever for subcontractors and their accountants to get a clear view of their finances throughout the year and understand how much they’ll owe (or be owed) once tax time rolls around.
But if you’re still murky on what the Construction Industry Scheme actually is, don’t worry: we explain all in this blog post.
What is the Construction Industry Scheme?
The Construction Industry Scheme is a scheme set up by HMRC to collect income tax from people working in the construction industry. Through this scheme, contractors deduct money from their payments to subcontractors throughout the year and pass this on to HMRC on their behalf.
If you’re a subcontractor in the construction industry, you’ll likely see deductions of 20% or 30% (depending on whether or not you’re registered for CIS) on any payments you receive from contractors. These deductions count towards your annual tax bill, which means you’ll probably find you’ve already paid a significant portion of your tax and National Insurance once tax time comes around.
However, because the scheme involves money being deducted at the source, it can be a bit more complicated to understand your actual turnover for the year—and how much tax you’ve already paid.
Who is the scheme for?
The Construction Industry Scheme concerns contractors and subcontractors working in the construction industry.
If you’re a contractor (i.e. you pay subcontractors for construction work), you must register for CIS, deduct money from any payments you make to subcontractors, and forward this money to HMRC.
Subcontractors are construction workers who work for contractors. A subcontractor might be:
- A sole trader
- The owner of a limited liability company
- A partner in a partnership or trust
If you’re a subcontractor, you’re not obliged to register for CIS, but you will pay deductions at a higher rate if you’re not registered. If you work as both a contractor and a subcontractor, you’ll need to register as both.
CIS covers most construction work on permanent or temporary buildings or civil engineering structures like roads and bridges. However, there are certain exceptions, so if you only do certain types of work, you might not have to register for CIS. For example, the scheme doesn’t apply to:
- Architecture and surveying
- Scaffolding hire
- Carpet fitting
- Making or delivering materials used for construction
- Working on a construction site but not in construction—e.g. canteen or site admin staff
What about gross payment status?
If you prefer not to have money deducted throughout the year, you might be able to opt for ‘gross payment status’. This means that contractors will pay you in full without any deductions, and you’ll pay all of your tax and National Insurance yourself at the end of the year.
There are some conditions you need to meet to qualify for gross payment status, though: you’ll need to be earning at least £30,000 per year and be able to show that you’ve paid your tax and National Insurance on time in the past.
How to register for CIS as a subcontractor
If you’re already registered as a sole trader (or another type of business), you can register for the Construction Industry Scheme on the HMRC website. To do this, you’ll need some details about you and your business, including:
- Your legal business name (which could be your name or a trading name)
- Your National Insurance number
- The Unique Taxpayer Reference (UTR) of your business
- Your VAT registration number (if you’re VAT-registered)
What happens if you don’t register?
As a subcontractor, you don’t have to register for CIS if you don’t want to. However, if you don’t register, contractors will have to deduct 30% of your pay to pass on to HMRC instead of 20%.
This means you might end up overpaying on taxes—and whilst you will get this back in a rebate, it could result in cash flow issues throughout the year.
Filing your annual tax return as a CIS subcontractor
Like all self-employed people, CIS subcontractors are responsible for paying the correct amount of tax and National Insurance each year. This means that you have to file a Self Assessment tax return each year, which includes:
- The total revenue you earned over the year (pre-tax)
- Any allowable expenses you’re entitled to claim
- Any deductions contractors have already made under CIS
HMRC will then work out your tax and National Insurance bill and deduct any payments made through CIS. If you still owe tax, you’ll need to pay it by 31st January following the end of the tax year. If you’re owed money, you’ll get a refund from HMRC.
How Coconut supports CIS subcontractors and their accountants
CIS deductions make it more difficult for subcontractors to understand how much they’ve made in total over the year and how much tax they’ve already paid.
To combat this, we’ve introduced a new feature to help subcontractors and their accountants to manage their finances using Coconut. Whether you’re a CIS subcontractor or an accountant with subcontractor clients, you can now easily add back CIS deductions within our platform in just a couple of clicks. This makes it much easier to keep track of your (or your clients’) actual turnover for the year and any tax that’s already been paid.
Plus, when it comes to tax time, your accountant can run our SA103S report for the tax year and see the figures for total turnover and the tax already withheld—making the Self Assessment tax return a breeze.
Want to try it out?
Want to take the confusion out of CIS deductions? Try out Coconut for 30 days by signing up for a free trial—or sign up as an accountant to help your CIS subcontractor clients get a clearer picture of their money.
