Small Business VAT Registration Threshold Explained
Everything you need to know about the VAT registration threshold after April 2024.
Key Highlights
- The Construction Industry Scheme (CIS) mandates that contractors deduct 20% from registered subcontractors’ and 30% from unregistered subcontractors’ pay as advance tax payments, which aim to ensure compliance and reduce tax evasion in the construction sector.
- Self-employed individuals or businesses involved in construction work or subcontracting must register for CIS. This includes general construction, demolition, site clearing, and repairs. Businesses spending over £3 million on construction within a year must register.
- CIS deductions are included in a subcontractor’s Self-Assessment tax return, helping determine the tax owed or overpaid for potential refunds
What is a CIS (Construction Industry Scheme)?
The Construction Industry Scheme (CIS) is an HMRC tax scheme for self-employed subcontractors in the construction sector. Designed to prevent tax evasion, CIS requires subcontractors to have 20% of their gross pay withheld from each payment and remitted to HMRC as an advance payment on income tax and National Insurance contributions for a tax year.
Which category of self-employed individuals need to register for CIS?
Self-employed individuals in the construction industry, especially subcontractors, must register for the CIS. This requirement addresses common tax evasion issues in the sector, often arising from cash payments and informal work arrangements. CIS applies not only to general construction jobs but also to demolition, site clearing, repairs, and installations. By mandating tax offsets directly from subcontractor payments, CIS aims to reduce tax avoidance and ensure compliance across the industry, where a significant number of the UK’s self-employed workforce operates.
Insight
Any business in the construction industry working with subcontractors—whether a limited company, limited liability partnership (LLP), or sole trader—must register for CIS tax.
Registration is required if you pay subcontractors for construction tasks or if your business isn’t directly in construction but has spent over £3 million on construction within the last 12 months since your initial payment.
If you perform construction work for a contractor, you must register as a subcontractor.
Should you meet both criteria, registration simultaneously as a contractor and subcontractor is necessary.
What happens if you don’t register with HMRC for CIS?
Failing to register as a contractor or subcontractor for CIS can lead to serious consequences. HMRC may start with a warning letter for contractors but can escalate to fixed penalties plus interest on unpaid taxes. Subcontractors face higher tax deductions at 30% instead of a standard 20%, resulting in increased tax liabilities and reduced take-home pay.
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How does the self assessment tax return apply to cis workers?
Since CIS is an advance payment on income tax and NI contributions, subcontractors report their total income, including CIS payments, through their Self-Assessment tax return. By calculating their actual tax and National Insurance due, they can determine if they’ve overpaid and may qualify for a refund. Given the often unpredictable income in the construction industry, HMRC benefits from collecting CIS payments throughout the year to ensure consistent tax compliance,
Read also: How to Register for Self Assessment Tax Return on GOV.UK
Illustration
Scenario
John is a self-employed electrician working as a subcontractor. He is registered under CIS but not on the gross payment scheme, which means CIS offsets apply to his pay.
Payment Agreement
John agrees to a job with a contractor for £20,000 in labour. As the project progresses, he spends £3,450 on materials such as wiring and cables and consumables such as screws, nails, and fasteners.
Insulation and electrical tape are essential to complete the job.
CIS Deduction on Labour
Since John is not on the gross payment scheme, the contractor withholds 20% of the labour cost as a CIS deduction, calculated as:
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Labour: £20,000 x 20% = £4,000 (CIS deduction)
Payment Received
After the CIS deduction, the contractor pays John:
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Labour (after deduction): £16,000 (£20,000 – £4,000)
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Materials and Consumables: £3,450 (paid in full, as CIS tax withholding doesn’t apply to materials)
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Total Payment to John: £19,450
Record keeping
The contractor is to provide at least one ‘payment and deduction’ statement, sometimes called a PDS, each tax month and within 14 days of the end of the tax month (a tax month runs from the 6th of one month to the 5th of the next, for example, 6 May 2024 to 5 June 2024).
| Section | Details | Amount (£) |
|---|---|---|
| Gross Income | Labour | 20,000 |
| Materials and Consumables | 3,450 | |
| Turnover (Labour + Materials/Consumables) | 23,450 | |
| Expenses | Total Allowable Expenses | 3,450 |
| Net Profit | Turnover – Expenses | 20,000 |
| CIS Deductions | Contractor deductions | 4,000 |
| Adjusted income | Net Profit – deductions | 16,000 |
| Tax and NIC for the 2024/25 tax year¹ | ||
| Taxable Income Calculation | Profit from Self-Employment | 20,000 |
| Minus Personal Allowance | 12,570 | |
| Taxable Income | 7,430 | |
| Income Tax | Tax at 20% on Taxable Income | 1,486 |
| NI Contributions | Class 2 NICs² (treated as paid) | _ |
| Class 4 NICs (( £20,000 – £12,570) x 6%) | £435 | |
| Total NICs | Class 2 + Class 4 Contributions | £435 |
| Total Tax and NIC Due | Income Tax + Total NICs | 1,921 |
| CIS Deduction Offset | Minus CIS tax offsets | 4,000 |
| Final Calculation | Income Tax Overpaid (Refund Due) (£ 4,000 – £ 1,921) | 2,079 |
¹ This section calculates the actual tax and National Insurance liability, helping the subcontractor determine if they’ve overpaid and may be eligible for a refund.
² If your profits are £6,725 or more a year, Class 2 national insurance contributions are treated as having been paid to protect your record.
Insight
The nature of CIS calculations means that subcontractors typically claim actual expenses related to their work, which excludes them from claiming the trading allowance. Since the trading allowance is a flat £1,000 deduction intended for low-expense or casual income, claiming specific expenses offers a greater tax advantage and more accurately reflects their business costs under CIS.
Who qualifies as a contractor or subcontractor under CIS?
Under CIS, you are considered a contractor if you pay subcontractors for construction jobs or if your business spent over £3 million on construction projects in the 12 months following your first payment. If you take on construction projects for a contractor, you qualify as a subcontractor.
See also: GOV.UK Employer PAYE Reference Number 2024 Explained
How are VAT, domestic reverse charge, and CIS deductions made on invoices?
In the construction industry, it’s essential to ensure that invoices are correctly prepared to comply with VAT and CIS requirements. When a contractor receives an invoice from a subcontractor under CIS, it details labour costs separately from direct costs such as materials and consumables. The invoice indicates any CIS tax on the labour portion, showing either a 20% deduction for registered subcontractors or a 30% deduction for those not registered under CIS. The materials and consumables listed remain unaffected, allowing subcontractors to receive full payment for these costs.
The invoice must also be formulated according to the VAT reverse charge mechanism for VAT-registered contractors and subcontractors. This means the subcontractor issues the invoice without VAT and includes a note, such as, “VAT on this supply to be accounted for by the principal contractor.” The principal contractor then handles the VAT by accounting for it directly in their VAT return rather than paying it to the subcontractor. This format meets compliance requirements and reduces the risk of VAT fraud within the sector.
Insight
If either the contractor or subcontractor is not VAT-registered, the reverse charge mechanism does not apply. In such cases, the subcontractor should charge VAT on their invoice as usual if they are registered, and the contractor will pay this VAT directly to them.
If the subcontractor is not VAT-registered, they will not charge VAT on their services, and the contractor does not need to account for VAT under the reverse charge.
What is the CIS gross payment status?
CIS Gross Payment Status (GPS) is a tax designation that allows subcontractors to receive full payments without deductions, enabling them to manage their tax and national insurance obligations at the end of the tax year. To qualify for GPS, subcontractors must meet several eligibility criteria:
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Compliance with Tax and NIC Obligations: Businesses must consistently meet PAYE, tax, and NIC requirements, demonstrating a reliable record of timely and accurate payments. They must also actively engage in construction or provide labour within the UK construction industry.
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Minimum Turnover Requirements: For the past 12 months, sole traders or each partner in an LLP must show at least £30,000 in net construction turnover. Limited companies must have a minimum of £100,000 in total net construction turnover or £30,000 per director.
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Dedicated Bank Account: The business must operate through a specific bank account, ensuring transparent financial management.
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VAT Compliance: New tests focus on VAT compliance, allowing some flexibility for minor delays:
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Contractors may submit up to three late VAT returns, provided they are no more than 28 days late.
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One late VAT payment is permitted if the liability is less than £100 and is settled within 14 days.
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Warning
HMRC may revoke a subcontractor’s GPS if there are reasonable grounds to suspect fraud related to VAT, corporation tax, income tax, or Pay As You Earn (PAYE).
What are the CIS rates 2024, and are they subject to renewal after every new tax year?
CIS rates are fixed and not subject to annual review. It’s important to note that the CIS tax deductions scheme is not a direct tax but an advance payment on a subcontractor’s tax liability. For those registered with CIS, the standard deduction rate remains 20%, while unregistered subcontractors face a 30% deduction. This policy aims to reduce tax evasion and establish greater compliance within the construction industry, adding a layer of formality to business operations.
Disclaimer: This blog is for informational purposes only and reflects our understanding of the topics discussed. It should not be considered tax advice. Please consult a qualified tax advisor for personalised guidance.
Excellent article! Clarifying the construction industry scheme like this will prove useful for my own professional UK accountants business.