There are 3 different types of CIS tax rates applicable. We explain the different Construction Industry tax rates of 30%, 20% and 0%.
CIS is not an additional tax. Any deductions suffered, whether they be 30% or 20% can be reclaimed from HMRC. Typically a business will use the deductions suffered to reclaim against their year-end tax liabilities.
Subcontractors who are 20% and 30% are therefore receiving less now from their contracts. But they will pay a lower tax liability in the future. Self-employed taxpayers typically reclaim the CIS deducted on their personal tax return. Companies can offset their CIS against other taxes such as Corporation Tax.
Subcontractors who are 0% receive the full amount from their contracts now. But they have no deductions available to offset against their year-end tax liability (or other taxes).
As a result, the CIS tax rate does not affect the overall taxes payable. It does however affect the cash flow of the business.
Subcontractors can choose not to register for CIS. But those businesses which choose not to register suffer the highest rate of deduction which is 30%.
Most subcontractors don’t want to and can’t afford to suffer a CIS tax rate of 30%. Therefore they opt to register.
Any business which regularly does work covered by CIS should register as a subcontractor. Read our blog register as a CIS subcontractor for detailed guidance on how to do this.
By registering as a subcontractor the CIS tax rate then reduces to 20%.
Businesses which register as subcontractors will suffer tax deductions at a lower CIS tax rate of 20%.
Subcontractors who suffer the CIS tax rate of 20% are known as net subcontractors.
Typically smaller subcontractors will choose to accept a CIS tax rate of 20%. The reason for this is the deductions suffered can be used to offset against their personal tax liabilities (Individuals or Partnerships) or their corporation tax liability (Limited Companies).
This can be useful for the smaller business as it helps them save for their year-end tax bills.
Once a business expands beyond a certain size, the effect on cash flow of a CIS tax rate of 20% becomes too great.
Fortunately businesses can then register to become a gross subcontractor.
Businesses can choose to register for gross payment status.
Read our blog CIS gross payment status. It includes information on who can register for gross payment status and how to do it.
A business which is registered as a gross subcontractor receives payments in full from their contractors. There are no deductions. As a result, the CIS tax rate is effectively 0%.
This is great for cash flow in the short term. However it is important to remember that these businesses must be disciplined and put something aside to save up for their end of year tax liabilities.
CIS Tax Tip: Some businesses don’t change to gross status as they are worried about the end of year tax liability. The simple thing to do is when you change to gross status is set up a deposit bank account. Cash flow should improve as contractors pay you in full, therefore use the additional monies received to transfer into the new deposit account. If you suffer from cash flow problems at a future point you can transfer money back from the deposit account, reducing overdraft and bank charges. So long as you continue to save in the deposit account you can use these savings to pay your tax liability.
Subcontractors who pay the full 30% tax rate are very rare.
Typically it will be a new business who does not realise they should be registered.
Alternatively it will be a business who doesn’t typically carry out work for contractors.
For example a kitchen retailer who only sells directly to homeowners (not covered by CIS) is then approached by a contractor to do a house installation (is covered by CIS).
Mainly small businesses pay the 20% tax rate, such as one man bands or owner managed companies. Typically the turnover is under £30,000.
Sometimes we do come across businesses with £100,000 turnover plus who are still net subcontractors. Unfortunately this happens when their accountant or tax advisor has failed to be pro-active in recommending and explaining the benefits of gross CIS tax rates.
These businesses often unnecessarily suffer quite badly with cash flow problems.
We would recommend that all businesses who qualify should apply for gross payment status.
The previous 2 options are effectively paying their taxes in advance. If given the option of paying their tax liabilities in advance we believe that most businesses would refuse.
Also gross registered subcontractors don’t have the additional admin burden of chasing up CIS tax deduction paperwork from contractors.
CIS tax rates conclusion
The majority of subcontractors can choose what payment deductions they want to suffer.
They can suffer CIS tax rates of 30% which is an unregistered business, 20% which is a net subcontractor or 0% which is a gross subcontractor.
The choice can be personal preference but we would always recommend applying for gross status when possible.
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