What is CIS Tax Rebate? This is the repayment of excess deductions made from subcontractor payments under the Construction Industry Scheme (CIS).
Under CIS, contractors deduct money from subcontractor payments and pay it to HM Revenue and Customs (HMRC). HMRC treats these deductions as advance payments towards the subcontractor’s tax and Class 4 and Class 2 National Insurance (NI) contributions for the year.
CIS Tax Rebate or Refund
The advance payments of tax and NI contributions by CIS subcontractors is made without taking into account their annual tax allowance. In 2019-20, this individual tax free allowance was £12,500.
Assuming a subcontractor is suffering 20% CIS deductions, then once his labour earnings reaches £12,500 he would have overpaid £2,500 of income tax. This overpayment which is usually termed CIS rebate or refund can be claimed back from HMRC on his annual Self Assessment (SA) tax return.
After deducting business expenses, the taxable profit of the subcontractor may be less than his labour costs which would result in a higher CIS Tax rebate or refund.
Registration as a contractor and subcontractor
It is mandatory for contractors in the construction industry to register with HMRC for CIS. However, subcontractors are not mandated to register. However, subcontractors who are not registered suffer 30% deduction from their labour payments as opposed to 20% if they are registered for CIS with HMRC.
CIS deductions for labour and not materials
Contractors are required to make deductions from labour costs of either 20% for registered or 30% for unregistered subcontractors.
Payments to subcontractors for materials are outside the scope of the CIS scheme. Therefore, all payments for materials supplied by subcontractors are made gross.
CIS Payment Deduction Report
HMRC requires contractors to provide their subcontractors with a monthly CIS Payment Deduction Report as evidence of payment and deductions made under the scheme.
At the end of the tax year, the subcontractor can request an annual CIS Payment Deduction Report to assist with completing his Self Assessment Tax Return.
Monthly CIS Return
Contractors are required to submit a monthly CIS return to HMRC. The return includes details of all labour and material payments to subcontractors for the period starting from 6th of the month to the 5th of the following month.
Automatic fines for late CIS returns
There are automatic fines to contractors who persistently submit late or no monthly CIS returns.
Who needs to register as a CIS Contractor or Subcontractor?
You need to register as a contractor if either:
- you pay subcontractors for construction work
- your business doesn’t do construction work but you spend an average of more than £1 million a year on construction in any 3-year period
You need to register as a subcontractor if you do construction work for a contractor.
You must register as both if you fall under both categories.
What construction work is covered by CIS?
CIS covers most construction work that involves:
- a permanent or temporary building or structure
- civil engineering work like roads and bridges
- preparing the site, eg laying foundations and providing access works
demolition and dismantling
- building work
- alterations, repairs and decorating
- installing systems for heating, lighting, power, water and ventilation
- cleaning the inside of buildings after construction work
What work is outside the scope of CIS?
Registration as a CIS contractor or subcontract is not required for work including:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that’s clearly not construction, eg running a canteen or site facilities
Does an overseas business need to register for CIS?
According to HMRC, the same CIS rules apply if your overseas business do construction work as a contractor or subcontractor in the UK. Read more about how to register and pay tax if this applies to you.
Please feel free to contact us for further information on our CIS Tax Rebate service.
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