Interactions between IR35 and CIS
The Construction Industry Scheme applies to self-employed businesses which operate within the construction industry.
Income Tax or Corporation Tax is deducted at source by the contractor from entities which are not gross-registered, which is then treated as a tax credit. As the relationship between the construction business and the contractor is not one of employment, no national insurance contributions need to be made.
IR35 applies where an individual engages with their contractor through an intermediary, such as their own limited company, but the circumstances of the engagement indicate that the individual is a deemed employee.
6th December 2021
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1) If the contractor has a lot of control over the individual, for example when and where they work and how they do their job
2) If there is an obligation for the contractor to provide work and an obligation for the individual to accept it
3) If the individual must do the work themselves and is not allowed to use a substitute
4) If the individual does not pay the relevant insurance (i.e. public liability)
5) If the individual does not take on any financial risk – for example if they were not responsible for rectifying mistakes at their own cost.
HMRC’s Check Employment Status for Tax tool (CEST) is useful in determining an individual’s status.
Where IR35 applies, the contractor must put payments to the company through their payroll, deducting PAYE and national insurance, and paying 13.8% employer’s national insurance themselves. The employer’s national insurance is a cost to the contractor, and it is not permitted to deduct this from the subcontractor’s fees.
Where the net payment is paid to the subcontractor’s company, it is not subject to Corporation Tax. It is employment income of the individual and can therefore be extracted as a tax-free salary (or tax-free dividend if the individual is a majority shareholder). It is worth considering which is the most tax efficient and appropriate.
From 6 April 2021, medium and large-sized contractors need to assess the status of their subcontractors themselves. The thresholds for a medium business is turnover of £10.2m, balance sheet total of £5.1m and 50 employees (not including deemed employees).
The contractor must issue the subcontractor a “status determination statement”, which the subcontractor can appeal if they feel it is incorrect.
Where the contractor is small, the subcontractor must self-assess to determine if IR35 applies.
If they determine that it does, the gross deemed earnings will be subject to PAYE and NICs through the subcontractor’s own payroll.
However, because the small contractor is treating the subcontractor as self-employed, they may also be deducting CIS tax, leading to a double tax effect. This CIS tax can be offset in the subcontractor’s payroll to reduce pressure on their cash flow.
Alternatively in this instance, it would be beneficial from a tax-flow perspective for the subcontractor to gross-register, and therefore have 0% CIS deducted, as long as the business meets the relevant criteria to do so.
For further information please contact your usual adviser, or alternatively click here…