As per the Cranfield Society of Chartered Accountants, a fully accredited independent organization in the UK, the CIS Tax is a contract for tax obligation between contractors and their sub-contractors. The contract provides for a basic contractual agreement between two parties that enables them to enter into a tax partnership whereby the contractors pay the UK tax burden on behalf of their sub-contractors. The benefits are that there is no need for the contractors to be based in the UK to take up such contracts, thereby saving a lot of taxes for the government, and the government can easily contact the contractor based in the UK. Hence, not only do the UK taxpayers get the benefit of reduced tax rates but also the construction contractors have the option of taking up contracts from UK-based accounting firms.
Liable to Make One Single Payment
There are various benefits that are enjoyed by the individuals, companies, and businesses, which pay the appropriate CIS tax according to the schedule fixed by the UK authorities. The individuals, who pay the tax bill on an annual basis, enjoy a number of advantages. One of the main advantages is that they are liable to make one single payment that covers the entire payment schedule of the tax year, irrespective of the number of payments made throughout the year. This also helps the taxpayers plan their expenditure and income for the following year. The government, through the UK construction industry scheme, encourages small and medium-sized companies in the UK to take up contract jobs to perform a variety of tasks related to the development of infrastructure in the UK. At the same time, the subcontractors are able to reduce the overall costs by opting for the available, cheaper resources. In case of late payments by the contractors, the UK government has the right to penalize the subcontractors, in order to regain the costs lost due to late payment of the contractors.
Calculate the Cost of the Project
It is important to note that there are separate taxes applicable to each and every contract between the contractor and the subcontractor. However, the two taxes are combined in the commonly used term ‘royalty’ to calculate the cost of the project. The contractors pay the royalty every month, as decided by the United Kingdom government. Similarly, the subcontractors pay the royalty, which is calculated as per the rates prevailing in the UK market. These rates vary from one area to another. According to estimates, the total amount of contract spend was estimated at more than 1.2 billion pounds in the last year alone. It is expected that this figure will rise in the coming year. If you are a contractor planning to engage in construction projects in the UK, then it is imperative that you understand the contract laws of the UK, so that you are not charged with the excessive rate of the tax. You must consult an expert before you get started with any new construction project.
How do I get my CIS tax back?
If you’ve paid CIS tax, there are several ways to get relief, including offsetting the amount paid against the Construction industry scheme deductions deducted by your own subcontractors and the amount you have to pay to HM Revenue and Customs. You can offset the amount against a possible PAYE / NIC obligation towards HMRC. You can also request a refund of overpaid taxes once the return for the period has been submitted and accepted. The key is to keep accurate records and contact HMRC as early as possible to ensure you don’t get out of your pocket longer than necessary.
Minimize your Expenditure Under the Construction Industry Scheme
There are many other options available to minimize your expenditure under the construction industry scheme. For instance, there are two types of tax deductions – personal and corporate. You can deduct payments made to directors, joint ventures, limited liability partnerships, and people who are related to the project owner. The company that employs you can also deduct payments from the cost of employing you as a contractor. Similarly, you can claim tax reduction on interest, rent, expenses, and various other miscellaneous expenses. There are many ways through which contractors and subcontractors can save on their tax bills. However, the option that is most preferred by them is to go in for joint ventures or companies. In this setup, two or more contractors may be affiliated with a single company, which in turn is eligible for a discount. The tax deduction for the company becomes manifold, as compared to the individual contractor. Some of the big construction companies in the UK are opting for this option, as they can enjoy the benefit of a larger number of clients, who can be able to provide inputs to the project.
What do I need to submit to HMRC for CIS?
You’ll need to fill out a CIS300 monthly return. Remember that this must be submitted even if you have not paid any subcontractors in the relevant period. Failure to submit a CIS300 return to HMRC could result in fines. By submitting the CIS300 return, you are also declaring to HMRC that no one who appears on the return is an employee. So make sure you review your terms and conditions and how you work with subcontractors on a regular basis.
You can also choose to deduct your payments gross, that is, the direct costs of goods purchased for the project. This includes expenses on legal assistance, transport, and even utilities. In this case, the contractor would have to pay the amount directly from his own pocket. However, if he is not self-employed, he would have to pay the indirect tax through his employment status. Another important thing that should be kept in mind is that the contractor should ensure that all his expenses are incurred during his engagement stage. In the case of multiple employees, only those expenses that were indirectly incurred by the employees through their employment status can be deducted.