Tax Preparation for Subcontractors (CIS), Now Is The Time to Prepare
Author: LHP Director and Tax Specialist, Janet Collins
Are you a (CIS) construction industry subcontractor who has not yet turned to their tax return for 2020/21? Well, due to the way tax is deducted for subcontractors, you are most likely due a tax refund.
At LHP we like to ensure CIS Self-Assessment tax returns are completed efficiently, all allowable expenses have been accounted for in good time and nothing is overlooked.
One big tip here to help with your cash flow, now is the time to be preparing annual accounts and obtaining a potential tax refund early. LHP can help you with this. It might also help to read 3 ways Preparing Tax Returns Early can be a win-win.
How tax is collected
Construction subcontractors are classed as self-employed rather than employees taxed via PAYE. However, due to Construction Industry Scheme (CIS) rules, they are taxed 20% (or 30% depending on earnings) at source and deductions are taken directly from earnings by their CIS contractor.
These CIS regulations are aimed at cutting down on ‘perceived under-reporting of income in the construction industry’ but have left many subcontractors due a refund on those tax deductions.
When it comes to allowable expenses, we often see subcontractors missing out on a wide range of business costs, which when added up, can increase the amount of their tax refund considerably. So be sure when preparing your tax return, to claim the whole range of business costs, from mileage and equipment to admin fees.
Claiming expenses effectively
Due to the nature of the construction industry, expenses relating to travel are substantial. Mileage to construction sites add up and as most subcontractors base business premises in their homes, the majority of work journeys are allowable expenses.
There are 2 ways you can claim motoring and mileage. Use actual costs or HMRC’s approved mileage rates. If using actual costs, you must evidence amounts claimed as well as determining the proportion of business travel in the vehicle. Whichever method, you can only claim for business travel; you must be using your own vehicle and continue to use the same method in subsequent tax returns until you change vehicle. HMRC may also want extra evidence of travel, such as mileage logs, accommodation and subsistence expenses.
In addition to travel, many subcontractors incur business costs providing tools, equipment and material. These may include safety equipment and clothing. If the subcontractor is responsible for providing own tools, materials or safety gear – this is considered an allowable expense, even if the equipment is hired. For larger equipment purchases, it might be that capital allowances are more appropriate in terms of accounting for those expenses.
As well as expenses, most subcontractors will also have admin costs and fees. Whether it is home office, insurance, bank charges or accountancy fees, these are allowable expenses on your tax return and if forgotten (so many subcontractors do due to the large amount of construction costs), this can add up to a substantial tax overpayment.
If you are a subcontractor in the construction industry suffering CIS tax deductions from your income, let’s talk. For further information you can also visit our section on Construction and Engineering. Our friendly, helpful team can help with all relevant paperwork to ensure the accurate and efficient results you are due.