If you operate as a self-employed individual or as a contractor working within the construction industry, it is highly likely that you are aware of the CIS or Construction Industry Scheme.
According to this scheme, contractors are required to deduct CIS from any subcontractors paying this to the HM Revenue and Customs (HMRC) on behalf of the subcontractor. This tax is paid in advance to the subcontractors’ national insurance and income tax.
Unless you have agreed to be paid according to “gross status” you, as a contractor, will have CIS tax deducted from the income charged to your contracting business. The standard amount for any CIS tax deduction for an average verified subcontractor is 20 percent; however, if this sounds as if the HMRC is taking a large sum of your pay, then you should consider the alternative where you don’t register for the Construction Industry Scheme. In this situation, you will not be registered or verified and the amount deducted can increase to approximately 30 percent.
If you operate as a subcontractor, why are you likely to receive a CIS tax refund?
The reason for receipt of a tax refund is that you pay 20 percent tax at source on your income, and this does not take into account any personal tax free allowance. Moreover, the tax should be calculated according to profit and not one’s income; thereby, meaning that there are legitimate business expenses that can offset the profit to lower a person’s tax liability and maximize the value of the CIS tax refund.
Based on this, at the end of the working year when filing all the self-assessment tax return forms, you will likely have been overcharged. Basically, the tax received from your income throughout the year will amount to a figure higher than the one you truly owe; hence, the reasons why many people receive CIS tax refunds.
What Are The Top Tips To Maximize Your CIS Tax Refund?
Tip #1: CIS Vouchers
It is important to ensure you receive all CIS deduction statements from contractors you performed work for throughout the year. Without these specific tax vouchers, you cannot be certain that the contractor deducted tax correctly during the project and what tax amounts have been paid on your behalf to the HMRC.
Tip #2: Don’t Forget The Personal Allowance
Personal allowance refers to an amount you can earn each tax year that is tax-free. The tax-free personal allowance amount in the tax year up to April 2017 was £11,000.
Tip #3: Business Expenses
It is recommended that you ensure claims for any legitimate business expenses made including those of specific materials, hand tools, telephone costs, and work wear.
Tip #4: Mileage And Motor Expenses
While the rules for claiming mileage or motor expenses differ according to the company and can be technical, claiming a legitimate allowable motor expense can maximize your overall CIS tax refund.
Tip #5: Claiming Capital Allowances
If you have purchased equipment, tools, vans, machinery, and so forth to be used for work, these can be claimed as capital allowances. Capital allowances are beneficial because they increase your CIS tax refund.
What Is The Gross Payment Status?
If the company presents with CIS tax deducted from its income, this can be detrimental to the company’s cash flow. While you can “opt out” from the CIS tax option and avoid tax being deducted from your income, this only occurs when the company receives a “Gross Payment Status” categorization where no CIS deductions can be taken from any incomes. The company qualifies for Gross Payment Status when indicates to HMRC that it passes the following assessments:
– payment of tax and national insurance on time in previous years
– the business provides construction work in the United Kingdom
– the business operates using a bank account
HMRC will examine your company’s turnover for the past year. Ignoring cost of materials and value-added tax, your average turnover needs to be:
– £30,000 as a sole trader
– £30,000 for both partners in a partnership
– £30,000 for all directors in a company
The majority of construction workers and businesses file their own CIS tax returns, and there is nothing wrong with this if you understand the regulations. If, however, you desire reassurance that you have filed the correct tax refund, then we can be of assistance.
If you wish to make a claim, you can find the claim form here on the Tax Returned website.