IR35 came into force in the private sector in April last year, but it continues to cause confusion, particularly in the construction sector where the Construction Industry Scheme (CIS) appears to conflict with IR35 for tax deduction, with many contractors and construction firms assuming that CIS means that IR35 doesn’t apply.
In this article, we discuss the difference between IR35 and CIS, and how the two interact.
What is IR35?
IR35 is the government tax legislation which is designed to prevent “disguised employment”. As of April 2021, end-users are now responsible for determining the IR35 status of all workers. If a worker is deemed as being “inside IR35” this means that HMRC consider them an employee and the end hirer must pay income tax and NIC on their behalf. “Outside IR35” workers are considered being self employed and are therefore responsible for their own taxes.
When does IR35 apply?
IR35 will come into force as a result of a Status Determination Test. All contractors must be assessed to determine their IR35 status, and an SDS (Status Determination Statement) should be issued. Some of the main factors that determine IR35 status are Supervision, Direction and Control (if a contractor is under SDC they will likely fall inside IR35).
IR35 means that HMRC might look closely at the SDS and whether the correct decision has been made. Rather than guessing, it is crucial that all areas are considered. If challenged, HMRC will look at “the reality” of the working relationship, including contracts and the day-to-day activities of the role in question.
What is CIS?
Construction Industry Scheme (CIS) is the HMRC tax deduction scheme which helps guarantee the right amount of tax being paid by sub-contractors. Under CIS, contractors deduct money from a contractor’s payments, and pass it directly to HMRC. The payments then count as advance payments towards tax and NIC. Those registered for CIS will have 20% of their earnings deducted from their payments, and those not registered will have 30% deducted.
Like IR35, if a contractor is deemed as being under Supervision, Direction and Control, then they would not qualify for CIS.
On the surface, it might look like moving from being a limited company to being self employed and registering for CIS will maximise earnings in the wake of IR35. But to qualify for CIS, certain factors must be met, including performing a construction operation.
What is a Construction Operation?
To qualify for CIS, the role must meet the work covered by CIS, which covers most work to a permanent of temporary building or structure, as well as civil engineering works such as bridges or roads.
But just because work is carried out on a building site, it doesn’t necessarily qualify for CIS. Construction operations include most building and demolition roles but do not include roles such as site security or site facilities. If you’re not sure whether CIS applies, Ship Shape Pay can advise you.
Does being inside IR35 prevent CIS payments?
In essence, no. While the two are both concerned with the liability of tax for contractors, the process is different.
If IR35 is not applicable, then CIS should be the priority for small end users. But while both IR35 determination and CIS determination tests may reach a similar decision, there are times where a CIS SDC and the result of SDS test will not be completely aligned (one might pass, and one might fail). Therefore, it is crucial to carry out supply chain audits to remain compliant.
Recruitment agencies should register as being both contractors and subcontractors under CIS.
- Contractor - Agencies pay subcontractors for construction work.
- Sub-contractor – Agencies are paid by end clients who are contractors in the construction industry.
For contractors working under a limited company but who are subject to supervision, direction, or control, you might consider working under an umbrella company who will be responsible for tax and NICs on your behalf.
Ship Shape can advise you and help you ensure that your payroll is IR35 and CIS compliant.
