|Yearly Set Off
Updated on 16 April 2017 by Accountant
- Registration for CIS scheme;
- What details you have to give to Contractor;
- Receiving payments – gross or under deduction;
- Gross-paid subcontractors;
- Gross-paid subcontractors and the annual compliance review.
|CIS||Construction Industry Scheme|
|HMRC||HM Revenue & Customs – Tax office in the UK and NI|
|NIC||National Insurance number|
|UTR||Unique taxpayer reference number|
1. Registration for CIS scheme
If you work as a subcontractor, you must register with HM Revenue & Customs (HMRC) before you start working.
If you don’t register with HMRC, contractors have to make a deduction from your payments at the higher rate ( 30%).
To register as a subcontractor you will need your NIC, UTR and VAT.
1. NIC – National Insurance number
If you do not have National Insurance number, you need to contact National Insurance number application line below:
Telephone: 0345 600 0643 or 0345 600 0644 (Monday to Friday, 8am to 6pm).
You will also need your unique taxpayer reference number (UTR).
If you don’t have a UTR, register as a new business for Self Assessment and choose ‘working as a subcontractor’ when prompted. You’ll be registered for Self Assessment and CIS at the same time.
If you are registered for VAT, you will need your VAT number as well.
Sole trader registration
You can register for CIS online by logging in with your Government Gateway ID.
You can apply for gross payment status at the same time.
Limited companies and partnerships registration
HMRC will register the partnership separately to your sole trader registration.
You should still register for CIS if you’re a subcontractor based abroad but do construction work in the UK.
When HMRC register you as a subcontractor, they’ll automatically set you up to receive payments with a deduction at 20% from your invoices. The deduction is held on account of your eventual tax and National Insurance contributions liability.
2. What details you have to give to Contractor
You’ll need to give following details to the Contractor:
- If you are Sole-Trader: Name, Unique Taxpayer Reference (UTR), National Insurance number.
- If you are Company: Name, Unique Taxpayer Reference (UTR), Company Registration Number.
Contractor will then contact HMRC to verify you. If HMRC can’t verify you, because you haven’t given the contractor the correct details about yourself, you could end up with a deduction from your payments made at the higher rate (30%).
Contractors won’t make a deduction from amounts you charge on your invoice for:
- Equipment which is now unusable (Consumable stores);
- Fuel used, except for travelling;
- Equipment hired for this job (Plant hire);
- Manufacturing or prefabricating materials.
If you don’t want to have any deductions from your payments, you’ll need to show HMRC your business passes qualifying tests (business test, turnover test, compliance test) and HMRC will grant you gross payment status.
Sole trader CIS refund
If you are a sole trader, CIS deductions can be refunded on yearly basis after submitting income tax return. CIS deductions are used as up-front payment for your income tax duties.
Limited company CIS refund
If you are a limited company, you can set off CIS deductions against PAYE (Pay As You Earn) and NICs (National Insurance contributions). HMRC will refund any deductions that the company is not able to set off against its PAYE liabilities during the tax year when the company sends in its Employer Annual Return (form P35) at the end of the tax year.
If you pay CIS deductions, you must claim these back through your company’s monthly payroll scheme. Don’t try to claim back through your Corporation Tax return – you may get a penalty if you do.
3. Receiving payments – gross or under deduction
Under CIS, there are two ways of paying subcontractors – gross or under deduction.
If you are registered for gross payment, the contractor pays you in full without any deduction. So you’ll need to pay tax and National Insurance Contributions (NICs) on this amount later through your tax return.
If you are registered for payment under deduction, the contractor takes off an amount (20%) before they pay you and they must pay this over to HMRC. You’ll still need to pay tax and NICs on your payments later through your tax return, but HMRC will set any deductions that have already been made from your payments against this bill.
If you haven’t registered for CIS or the contractor couldn’t verify you, the contractor will have to make deductions at the higher rate of 30%.
Contractors will give you a monthly statement of what they’ve paid you and deductions they’ve made.
4. Gross-paid subcontractors
If you’re already registered for CIS, you can apply for gross payment status by calling the CIS helpline or applying online.
Apply for gross payment status online
- Log in with your Government Gateway ID;
- From ‘Your tax account’, go to ‘Other services’;
- Choose ‘Construction Industry Scheme – Subcontractors’.
You’ll need to show that:
- you’ve paid your tax and National Insurance on time in the past;
- your business does construction work (or provides labour for it) in the UK;
- your business is run through a bank account.
HMRC will look at your turnover for the last 12 months. Ignoring VAT and the cost of materials, your turnover must be at least:
- £30,000 if you’re a sole trader;
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership;
- £30,000 for each director of a company, or at least £100,000 for the whole company.
5. Gross-paid subcontractors and the annual compliance review
If you’re a subcontractor and you are paid without any deductions taken from your payment, you will be subject to a review by HMRC. HMRC do this once a year by running something called a ‘Scheduled Review’, also known as an ‘Ongoing TTQT’ (Tax Treatment Qualification Test).
When HMRC review your payment status, they will check if you have done all the following:
- Completed all tax returns;
- Supplied any information that HMRC may have requested;
- Paid by the due dates;
- All tax due,
- All your own National Insurance contributions (NICs),
- Any PAYE tax and NICs due from you as an employer,
- Any deductions due from you as a contractor in the construction industry.
If you fail the Review, your gross-payment status may be cancelled. That means you will no longer will receive your payments in full without a deduction taken off.
You can re-apply for your gross-payment status after the period of one year after the cancellation date.
Source: HM Revenue & Customs, CIS