Tax can be difficult for an independent contractor, particularly since you have to do it all yourself. But it doesn’t have to be.
To help you out, we’ve put this blog post together, which will take you through the main tax considerations you need to know about – the construction industry scheme (CIS), VAT, and self-assessment – before giving you some tips that will help you manage your taxes. Let’s take a look at each one at a time.
The Construction Industry Scheme (CIS)
The CIS is a tax deduction scheme designed specifically for the construction industry. Its main purpose is to solve the perceived problem of tax evasion in the sector.
Under the CIS, contractors are required to deduct from a subcontractor’s payment and pay it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance contributions.
Here’s how the CIS works:
- Registration: You must register as a contractor with the CIS if you pay subcontractors to do construction work. You may be a sole trader, in a partnership or own a limited company. You must register before you take on your first subcontractor and check whether you should actually be employing them.
- Deductions: The standard deduction rate is 20% for registered subcontractors and 30% for non-registered subcontractors. Make sure to deduct the correct amount.
- Monthly returns: Contractors must submit monthly CIS returns to HMRC, detailing all payments made to subcontractors and the corresponding deductions.
It’s important to keep all documentation related to payments and deductions in case you make a mistake. You will need to provide HMRC with your documents. Mistakes happen, after all.
VAT
VAT is another important consideration for contractors, particularly as the business grows. If your turnover exceeds £90,000 a year, you will have to register. Even if you haven’t reached this threshold, voluntary registration can offer benefits, such as reclaiming VAT on business-related purchases.
Once registered, you’ll need to:
- Charge VAT: You’ll need to add VAT to your invoices for all taxable goods and services. The standard rate is 20% but some goods and services may qualify for reduced rates or exemptions.
- Submit VAT returns: VAT-registered businesses must submit VAT returns, usually quarterly. These returns detail the VAT you’ve charged to customers and the VAT you’ve paid on purchases, with the difference being paid to or reclaimed from HMRC.
- VAT schemes: Consider different VAT schemes, such as the Flat Rate Scheme or the Cash Accounting Scheme, which may simplify your VAT management and improve cashflow.
Self-assessment
Contractors can operate as sole traders, in a business partnership, or through a limited company. The most common option is sole traders, so we’ll examine how their profits are taxed. However, click on the following links to learn about taxes for partnerships and companies.
Sole traders report and pay tax on their income by filling out a self-assessment tax return, usually online. This process involves:
- Reporting your income: You need to include all the income you earn during the tax year.
- Claiming expenses: You can offset your income by claiming allowance business expenses such as tools, travel, and office supplies, to reduce your tax bill.
- Paying your tax: Based on the details you provide on your self-assessment return, you’ll need to pay any tax you may owe. The deadline is the 31 January following the end of the tax year you’ve reported for (31 January 2025 is the deadline for a 2023/24 self-assessment tax return).
Effective tax management
Managing your taxes efficiently is key to remaining compliant with tax laws and avoiding unnecessary stress. Here are some tips:
- Keep detailed records: Maintain accurate and up-to-date records of all income, expenses, and CIS deductions. Good record-keeping is not only a legal requirement but also essential for preparing accurate tax returns.
- Submit early if possible: Late submissions of CIS returns, VAT returns, or your self-assessment can result in mistakes (as you rush to complete) and/or penalties. Take your time, be careful, and start early.
- Use accounting software: Modern accounting software can automate many aspects of tax management, from tracking income and expenses to generating invoices and submitting VAT returns. This can save you so much time and reduce errors.
- Consult with an accountant: Tax laws can be complex, and an accountant can provide valuable guidance. They can help you navigate CIS, VAT, and self-assessment, ensuring you’re compliant and optimising your tax position.
If you’re a contractor in need of help with your taxes, get in touch with us today. We’ll help you where we can with timely advice or do your returns for you so you can focus on what’s really important – the job.
