Deductions. The tax rate that must be deducted by a contractor depends on the status of the subcontractor. The contractor is required to verify this status with HMRC before making payments to the subcontractor. Once this initial verification is completed, the contractor can rely on it for future payments, unless HMRC notifies the contractor of a change in the subcontractor`s status. It is also possible to be both a contractor and a subcontractor. For example, if Ryan, an electrician, is hired by a local contractor to perform work, his work would be the responsibility of CLC. If he himself outsourced some elements of his work to his electrician friend Jenny because he wanted to get the job done faster, he also has to register as a contractor and pay Jenny under the CIS. First, subcontractors. If you are paid by a contractor for work in the CIS, you must register with HMRC as a subcontractor.

According to the CIS, contractors must verify that workers are «registered» with HMRC. To do this, the entrepreneur needs your unique taxpayer reference (RMU) and national insurance number. Lee`s tax situation (paying too much tax through CSI deductions and receiving a refund) is common to many independent sole proprietors who are registered with CLC but do not have gross payment status. It usually occurs because the CSD deductions are based on income and therefore do not take into account personal allowance or operating expenses. (On the other hand, your Class 2 and 4 NIC liability and the tax due on all SEISS grants claimed will absorb part of your refund). The CiS Guide for Contractors and Subcontractors provides more detailed information on what is and is not covered by the system. Keep in mind that «self-billing invoices» are widely used in the construction industry – instead of issuing an invoice for your services, the contractor will collect a self-billing receipt and send you a copy with your payment (the idea is that this makes invoicing easier if the contractor and not the worker determines the price). You should always check «self-billing invoices» to make sure they match your records and what you expected to receive. Deductions on payment and deduction declarations of contractors – only subcontractors of the construction industry If you register with the CIS, the contractor must deduct and withhold the tax up to 20% of the invoice amount. If your invoice includes direct expenses such as renting equipment or tools, the tax should not be deducted from these amounts, as you should receive 100% of these costs without withholding the CIS deductions). If you are registered for VAT, read what happens if I become a VAT taxable person? under.

The rules on the reverse charge mechanism apply to suppliers of certain services notified under the CIS. HMRC should have written to all construction companies subject to VAT to inform them if they could be subject to a reverse charge. Suppliers no longer charge VAT to their contractors; Instead, the contractors who receive the invoices will estimate the VAT themselves by actually calculating the VAT on the subcontractors` services in box 1 of the VAT return, and if they are able to recover the VAT in its entirety, the VAT can be claimed on the same VAT return as a reverse entry in box 4. Please note that there may be an impact on cash flow for businesses that normally receive VAT on their supplies and use it as working capital until it is paid to HMRC, so companies should take steps to review their cash position. A subcontractor is a company that performs construction work for a contractor or provides personnel to perform that work, or outsources it to another person. This broad definition means that it can include project managers or engineers if they not only act as consultants, but are involved in the execution and management of construction work. As Lee`s example above shows, many subcontractors pay too much in taxes and social security contributions (NICs). Lee lives in England, he is registered as an independent subcontractor of the CIS, but does not use the gross payment system. He draws up his accounts for his tax return on the basis of the provisions.

During the 2020/21 tax year, Lee charged the following: As a subcontractor of CIS, you must register for both the self-assessment and the subcontractor as part of the CIS system (see the previous section for more details). You can request the gross payment status at the same time as you register as a subcontractor. Contractors must register for the system. Subcontractors do not need to register, but deductions are levied on their payments at a higher rate if they are not registered. It requires a contractor to deduct tax amounts from payments it makes to a subcontractor and registers these deductions with HM Revenue and Customs (HMRC). The amounts deducted will be treated by HMRC as advance payments on the subcontractor`s tax and social security contributions. Lee receives monthly statements from his contractor showing what he paid and what CIS deductions were withheld. Lee has CIS deductions of 20% (i.e. £18,000 x 20% = £3,600) withheld by the contractor for his own work, meaning Lee receives £14,400, but Lee is paid for all his equipment and tool rental costs without CIS deductions. Often, this happens when you or your accountant sign up for PAYE.

You just tick another box that asks, «Are you going to hire subcontractors in the construction industry?» There`s another type of CIS registration as a subcontractor: if your turnover exceeds £30,000 (or £30,000 per partner in a partnership or a director of your business), you can sign up for the gross payment system – again over the phone or online – and your contractors will pay you without deducting CIS tax – which can significantly help your cash flow. .

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