The Construction Industry Scheme (CIS) was introduced to combat tax fraud by getting contractors to “tax” subbies at source. The construction industry is the only industry in the UK where this happens – hence why it is called the Construction Industry Scheme.
Under the Construction Industry Scheme (CIS), a contractor makes deductions before issuing payment to a subcontractor. These deductions are then passed onto HMRC.
The contractor will issue the subcontractor with a CIS statement detailing the amount of the deduction. These deductions can then be used to offset any tax and national insurance owed by the subcontractor.
If you are a subcontractor that carries out construction work, you may have deductions made by contractors but you are still responsible for managing your own tax affairs and paying tax the correct tax.
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What is a CIS tax rebate?
Subcontractors who are not registered under the Construction Industry Scheme will have deductions made at 30%. Subcontractors who are registered will have 20% deducted.
These deductions are held by HMRC and used against income tax and NI. However, these deductions often exceed the amount of tax and NI due once expenses have been accounted for.
This results in an overpayment which is then returned to you in the form of a CIS rebate.
In other words, a CIS tax refund is HMRC refunding tax that you have already paid through your contractor during the previous tax year.
How is a CIS tax refund calculated?
As a self-employed individual, you can claim tax relief on many of your business expenses. These are offset against your gross income.
Allowable business expenses include:
- Business travel costs and parking (mileage expenses if using your own vehicle or cost of public transport)
- Tools, equipment and any protective clothing (including maintenance costs where relevant)
- Accommodation and subsistence if you have to stay away from home for work
- Professional fees, such as insurance, accountant’s fees and certifications or licences
- General business costs (for example, phone, internet, stationery and postage).
When you complete your tax return, you report your total income, your eligible expenses, and any CIS deductions. This is then used to calculate the amount of tax you owe or the amount of any refund you are due.
If you have paid too much tax, because the amount paid in CIS is more than you owe in tax and NI, then you will receive a CIS tax refund.
How do you know if you are eligible for a tax refund?
When you complete your tax return, you will be able to see how much tax you owe. If you have paid more than this in CIS, then it is highly likely you are eligible for a tax refund.
This is why it is important to keep accurate records of your total income, all your expenses and any payments made under the CIS scheme.
How to claim CIS tax rebates
If you are self-employed then you must report all your income to HMRC. This is done by completing self assessment tax returns each year.
To complete your tax return you’ll need information on all of your income and outgoings.
These include:
- CIS deduction statements
- Receipts for any allowable expenses
- Records of your income – this includes all income including PAYE income, business income, universal credit and other taxable income (such as rental income)
You can complete your tax return yourself or pay an accountant to complete it for you.
It is important that you keep copies of any invoices, receipts, and CIS statements as HMRC can ask you to provide evidence that the information provided on your tax returns is correct.
Sole traders
At the end of the tax year, you will need to complete a self-assessment. This is a record of your income, allowable expenses, and CIS payments.
This information will be used to calculate the amount of tax you owe. Essentially, any tax deductible expenses will be deducted from your gross income. You will then pay tax on any income over the personal allowance.
If you have made CIS payments these will be allocated against any tax you owe. If you still owe tax after this, you’ll need to pay it by 31 January following the end of the year you are completing the assessment for.
If you’re due a tax rebate, HMRC will usually refund the money owed by BACS using the details on your CIS tax return.
Limited Companies
If you are operating as a Limited Company, you should be claiming back any CIS payments through your monthly payroll scheme. If you have gross payment status under the Construction Industry Scheme, declare all your income in your Corporation Tax return as usual.
How long does it take to receive CIS tax refunds?
HMRC will only issue a CIS tax refund after they have received and processed your self-assessment tax return. You can normally see the status of your tax returns and any refund you are owed in your HMRC online self-assessment account. Any money owed for a CIS refund is normally paid by BACS to the bank account entered on your CIS tax return.
You may be able to get a tax refund in the tax year in which it arises if you have ceased work in the construction industry and all your tax affairs are up to date.
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Avoiding misunderstandings around employment status
The UK’s construction industry is the only industry in the UK where self-employed people are ‘taxed’ at source. This is to ensure construction workers pay the correct tax.
Unfortunately, many construction firms try to disguise employees as subcontractors so they do not have to pay tax, NI, pension contributions, holiday pay, sick pay and other such employee benefits.
As you can imagine, HMRC doesn’t like this and if they suspect a company is disguising employees as subbies, they may open an investigation. Even if your subbies are registered under CIS, pay CIS deductions and complete their returns on time, they can be reclassified as employees.
Having a formal contractor-to-subcontractor agreement in place can help reduce the risk of misunderstandings.
At HardHats, we specialise in creating bespoke subcontractor agreements to protect contractors and subbies from HMRC enquiries. Find out more here.
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