The Construction Industry Scheme (CIS) was set up to define how self-employed construction workers pay tax. If you work in this industry, some clients may require you to register under the CIS in order to carry out the contract work.
There are many benefits of the CIS, and having a CIS registered limited company can benefit you as a contractor even more than working through a CIS registered umbrella company. Read our top three reasons why you should consider a CIS registered limited company for your construction career:
1. You can claim Travel and Subsistence expenses
From 6th April 2016, contractors and freelancers who work through umbrella companies, and who operate inside IR35, are no longer able to receive tax relief on Travel and Subsistence expenses that are incurred during the course of work. Individual contractors in construction are not exempt, which means that even if you work through a CIS registered umbrella company you will not be able to claim any Travel and Subsistence expenses.
The alternative is to set up your own CIS registered limited company. Contractors who are able to operate outside IR35 can claim more allowable business expenses such as Travel and Subsistence and recoup a 20% tax saving as a result. This gives contractors the ability to maximise their take home pay in the most legal and tax efficient way possible.
If you are unsure whether you will be contracting inside or outside IR35, contact a tax status specialist such as Bauer and Cottrell.
2. You have the option to apply for gross payment status
When your limited company has gross payment status, you can enjoy gross payments, excluding VAT, from your client without the initial 20% tax deduction (CIS) or 30% deduction (non-CIS). To be eligible for gross payment status, HMRC will look at your company’s turnover for the last 12 months and require you to meet some additional criteria, which can be found here.
Being taxed 0% at source will provide you with more control over your limited company finances and give you access to all of your pay straight away. All you must do is ensure you pay your required tax on time, which our CIS accountancy service can help with.
3. You can opt for the VAT Flat Rate Scheme (FRS)
With a limited company, you can apply to be VAT registered on the Flat Rate Scheme if your taxable turnover (excluding VAT) for the next year will be less than £150,000. When you are on the FRS, you pay a fixed rate of VAT to HMRC, which will usually be 14.5% of turnover for labour-only building or construction services. When you bill your client for your services plus 20% VAT, you will keep the difference between what you receive as VAT payment from your client and the VAT you pay to HMRC. See an example below:
Example: You bill a client for £2000, and add 20% VAT, totalling £2,400. If your VAT flat rate is 14.5%, your company will pay £348 in VAT to HMRC. As your company received £400 in VAT but only paid HMRC £348 in VAT, it will have an additional profit before tax of £52. This income would be available to distribute after Corporation Tax is deducted.
The FRS is another way you can maximise your take home pay through a limited company. There are, however, some requirements to join this scheme, which can be viewed on the government’s website.
The above points are just three of the main benefits of having a CIS registered limited company; a limited company also offers increased control of finances and can show a higher level of professionalism and credibility.
Churchill Knight & Associates Ltd provides a bespoke CIS accountancy service, which includes limited company set up within 24 hours, help setting up your business bank account, registration for the CIS, VAT (and the VAT Flat Rate Scheme if you wish) and PAYE. We will also complete your bookkeeping and payroll, and provide you with unlimited tax advice tailored to you and your business.
Update: there are changes coming to the VAT Flat Rate Scheme from 1st April 2017. You can read about these changes on our blog.
You may also like to read:
- How do I apply for Gross Payment Status?
- What expenses can I claim through my limited company?