What is the construction industry scheme?
What is the construction industry scheme?
A contractor will deduct money from a sub-contractor and pay that to HM Revenue and Customs. These deductions are the advance payment by the contractor towards the subcontractor’s tax and National insurance.
Contractors have to register with the tax office for the schemes. In contrast, the subcontractors do not have to register but make higher rate deductions towards the tax and National Insurance if they are not registered. As a contractor, if registered, you can sign into the scheme to file your monthly returns. A contractor has to register as an employer with HMRC when you start to employ staff, even if you are the only director and staff.
What is the construction industry scheme?
The scheme used HMRC to collect income tax from those working in and around the building industry as subcontractors. It helps the HMRC to reduce the problem of ordering tax from the subcontractor’s earnings in the building industry as soon as they get paid by the contractors.
If you are an employee, your tax and National insurance are deducted from your earnings using PAYE, and for a sub-contractor, the 20% is taken off from your wages to pay it to HMRC under the CIS payment scheme.
As a subcontractor, you will be self-employed and pay 20% of the tax according to the CIS scheme. If you are not registered as self-employed, you must pay 30% of the tax as a subcontractor.
To register for the Construction Industry Scheme (CIS), you will need:
- Your legal business name – or a trading name if it differs from yours.
- The National Insurance Number.
- The unique taxpayer reference number (UTR) for your business.
- Your VAT registration number (if you’re VAT registered)
What is the difference between contractors and subcontractors?
When clients hire you to work on a specific project or on a freelance basis, they are usually considered a contractor. You provide the labor, services, and sometimes equipment to complete the task. Subcontractors are companies or individuals you hire to help you achieve a project.
To make payments to employees.
You must register before the first payday. Getting your employer’s PAYE reference number can take up to 5 working days. You cannot register more than two months before you start paying people.
To pay an employee before you get your employer’s PAYE reference number, you should:
- Run payroll.
- Store your complete payment submission.
- Send a late complete payment submission to HMRC.
CIS tax calculation
CIS tax to deduct – £100 calculated as the gross amount of £700 less than the materials of £200. They are giving a figure of £500 and then multiplied by the CIS tax rate of 20%. It then shows the £100 CIS tax to deduct. The contractor would pay £100 to HMRC and the subcontractor £740.
Remember to file the CIS returns to HMRC monthly.