How you handle payments under the construction industry scheme will depend on whether you are a sole trader, in a partnership, or you own a limited company. Making these as tax efficient as possible is key to maintaining a healthy cash flow.
For sole traders and non-incorporated business entities like partnerships, the initial payments made through CIS deductions will all need to be assessed at the end of the tax year.
In other words, once you put in your self-assessment tax return, the HMRC system will then calculate the amount you can potentially claim back as an overpayment.
Claiming back CIS deductions for unincorporated businesses can be a much lengthier process although it is simpler to manage in terms of administration and paperwork.
For a limited company, offsetting CIS deductions against PAYE is a lot more flexible and can be claimed back through the company’s monthly PAYE submission. It is, however, a lot more complicated.
CIS deductions that cannot be covered in a particular submission can be carried forward to the next month. Any excess deductions suffered can also be recovered at the end of the tax year.
How does CIS work with PAYE in a limited company?
Under CIS, a contractor will deduct a payment on account for a subcontractor’s tax liability of 20 or 30%, unless that subcontractor has gross payment status which allows them to get full pay.
Limited companies can offset CIS deductions against any relevant liabilities and these include corporation tax, national insurance contributions and student loans. They need to keep detailed records and invoices to highlight CIS deductions.
In 2021, new rules gave HMRC greater powers when dealing with CIS deductions, including the ability to change PAYE records accordingly. Good record-keeping is, therefore, essential.
Read more on ‘Is CIS or PAYE better?’
The benefits of gross payment status
If you are regularly getting large refunds from HMRC for CIS deductions, then it is generally thought to be a good idea to go for gross payment status. This is aimed at subcontractors, partnerships, and limited companies and you will need to meet several criteria to qualify.
What it means is that contractors do not make any CIS deductions, and the subcontractor’s tax is calculated in the normal way.
Keeping records of total CIS deductions
One of the key factors in offsetting deductions suffered against PAYE tax is that you need to keep appropriately detailed records.
CIS tax can be complicated depending on the number of contractors you deal with during a year and the size of your business. This is why it can be a good idea to work with an experienced accountant to ensure all the bases are covered and your tax liability is reduced.
How to offset CIS against PAYE
For sole traders and partnerships, the method of offsetting CIS is relatively simple. You need to complete the self-assessment return as normal for the financial year and use the CIS deductions field to include any payments taken by contractors.
The difference for incorporated companies who are part of the construction industry scheme is that they get almost immediate credit for CIS tax because the details are given each month during the normal PAYE submission.
If you are a company that has gross payment status, then all you need to do is list all your payments in your corporation tax return as usual.
If you do not have GPS, then you need to include all CIS deductions suffered to date in your monthly employer payment summary. This can be used to offset income tax, national insurance, and other liabilities.
It may be the case that your PAYE bill is reduced to zero in some months. In this case, you can pass on deductions suffered to offset national insurance and tax in the next month.
If there is liability left over at the end of the tax year, your company can either request a tax refund or leave that money to offset your PAYE bill during the next year.
What are the benefits of offsetting CIS against PAYE?
Offsetting CIS against PAYE in any tax year has several benefits for a limited company. It allows them to better manage cash flow and remain in control of the tax deduction scheme.
CIS deductions are payments of tax on account, which means that you are giving HM revenue money upfront.
While for a sole trader or partnership, this can only be reclaimed once the yearly tax submission has been put in, for limited enterprises, there is a great deal of flexibility to offset against allowable liabilities such as national insurance and corporation tax.
The key benefits are:
- Reduced tax liability: If you have a PAYE liability, you can offset any CIS deductions you have made against your PAYE liability. This could well reduce your overall tax bill.
- Improved cash flow: Offsetting against your PAYE liability, especially if you have gross payment status, can help to improve your cash flow significantly.
- Simpler administration: Offsetting CIS against PAYE can simplify your tax administration in the long-term.
Need more tax advice? VW Taxation are Construction Industry Scheme experts
CIS tax management can be a complicated area of accounting, and getting it right could save you both time in administration and, hopefully, reduce your tax burden for the year and improve cash flow.
The team at VW Taxation are the CIS tax experts with a wealth of experience in dealing with a range of different companies, including contractors and subcontractors. Based in Portsmouth, we’ve got a strong track record of helping businesses track important accounting elements that help reduce their tax burden.
If you would like to find out how we can help, contact our friendly team today.
Conclusion
Offsetting CIS against PAYE is critical whether you are a sole trader, partnership, or limited company. It’s important to understand the rules and how these can be used to your benefit to help reduce your liability in the short term and improve cash flow.
