Do you work in the building trade?
If you are self-employed in the building or construction trade, then you might have to pay tax under the Construction Industry Scheme (CIS).
A lot of new sole traders register for Self-Assessment but do not always register as subcontractors which could mean that the Contractors who they do work for will take a 30% tax deduction instead of the normal 20% from any payments.
Note that if you supply construction industry type services directly to a homeowner (so not to a contractor), then this would not fall under the CIS and the customer would pay you gross on the production of your invoice.
The CIS covers more than what you may typically think of as building and civil engineering work, for example, it includes work in demolition, site clearing, repairs and decorating, and installing power systems. The HMRC CIS manual details what work is included within the Construction Industry Scheme – see gov.uk or speak to your accountant.
Do other people work for you in the building trade?
There are two components of the Construction Industry Scheme (CIS), one is being a ‘contractor’ and one being a ‘subcontractor’. If you are engaging other self-employed workers doing construction work then you are a contractor and must register under the CIS.
It is also possible to be both a contractor and subcontractor at the same time. For example, if Ryan, an electrician, is contracted by a local builder to carry out some work, then his work would fall under the CIS. If he himself subcontracted out some elements of his work to his electrician friend Jenny because he wanted to get the job done quicker, then he must also register as a contractor and pay Jenny under the CIS.
Contractors have an obligation to decide if their workers are employed or self-employed. Whilst most contractors would no doubt prefer to take on workers on a self-employed basis (as this means less cost/responsibilities/paperwork etc for them), self-employment is a question of fact, not a choice.
In situations where a person works exclusively for one contractor and does not have the risks of running a business, then they are likely to be an employee, rather than self-employed – even if the work arrangement is only for a very short time, or they have an existing Unique Taxpayer Reference (UTR) or they provide their own small tools.
There are many people working in the construction industry who should be treated as an employee but are being treated as self-employed incorrectly.
Even where they are being treated as self-employed correctly, it is important to note that employment law status is different from tax law status. Tax law only recognises two types of status – employed and self-employed. For employment law, there are three potential statuses to consider – employee, ‘worker’ and self-employed.
A worker is basically someone who provides work or service as part of someone else’s business. For example, an electrician working for a building contractor could be a worker for employment law purposes even if they are self-employed for tax law purposes.
What should you be doing?
If you are a self-employed subcontractor then you will usually need to complete a Self Assessment tax return.
When you complete your tax return you will need to include your total sales income, which will be the amount that you have invoiced, not the amount you received after the CIS deductions.
When calculating the actual amount you pay tax and National Insurance contributions (NIC) on for your tax return, you can take into account any expenses ‘wholly and exclusively’ paid out for the purposes of your business, such as van expenses, tools and materials and administrative costs, including mobile phones.
Many subcontractors find themselves overpaying tax and National Insurance contributions (NIC). If you are in this position then HMRC should automatically process your refund after you have completed and submitted your tax return.
Completing and submitting a Self-Assessment tax return can be complex and daunting. You may consider your only option is to pay to use a professional tax agent to assist you.
But you should be aware that when it comes to CIS, there can be problems with certain tax agents who may work for a percentage of your refund rather than for a fixed fee and so have a vested interest in maximizing the value of the claim (which they might do by inflating the tax refund due by including non-tax-deductible expenses, for example).
You may have heard about supplying your services through your own limited company as a way of saving some tax. Setting up a limited (Ltd) company is very different from just being ‘self-employed’.
This, generally, may not be a suitable way to trade for the lower-profit making business because of all the administrative considerations (and you should note that if you are supplying your services to primarily one contractor, then you may well fall under IR35/the off-payroll rules, which makes things even more complicated!)
