Contractors

Under CIS, a contractor is a business that pays subcontractors for construction work, or a non-construction business that spends more than £1 million per year on construction. A subcontractor is any individual or business that carries out construction work for a contractor. Both must register with HMRC, and contractors are responsible for making the correct deductions.

CIS deductions are offset against your tax liability when you submit your Self Assessment tax return. If the deductions exceed your tax bill, HMRC will refund the difference. Keeping accurate records of all CIS deduction statements from contractors is essential to ensure you reclaim the correct amount.

If you are inside IR35, your allowable expenses are significantly restricted. You can no longer claim travel, subsistence, or home office costs in the same way as an outside-IR35 contractor. You are entitled only to claim expenses that a regular employee could claim. This is one of the main financial disadvantages of being caught by IR35.

IR35 (off-payroll working rules) is designed to ensure that contractors who work like employees pay broadly the same tax as employees. If HMRC determines that your contract falls inside IR35, you must pay Income Tax and National Insurance on your income as if you were employed. Since April 2021, medium and large private sector clients are responsible for determining your IR35 status.

For contractors outside IR35 operating through a limited company, the most tax-efficient approach is typically to pay a low salary (up to the NI Secondary Threshold) and extract remaining profits as dividends, which are taxed at lower rates than salary. Pension contributions made by the company are also highly tax-efficient. The optimal split depends on your personal circumstances and should be reviewed annually.