Tax Tips for Contractors in the Construction Industry

It is essential that contractors in the construction industry understand their tax responsibilities. 

Proper tax planning can minimise liability risk and ensure contractors, subcontractors and businesses in the construction industry remain compliant. It also helps to avoid fines and penalties from HMRC.

All contractors must register with the Construction Industry Scheme (CIS) before beginning any work. Contractors deduct tax and National Insurance contributions from subcontractors payments via the CIS. This is a set rate of 20% which the contractor passes to HMRC on behalf of the subcontractor. 

Whilst contractors must register for the CIS, it is optional for subcontractors. However deductions from subcontractors will be taken at a higher rate of 30% if they don’t register. 

Read more about the CIS on on our guide here.

Limited companies in the construction industry must pay Corporation Tax on profits earned. This is done via completing a Corporation Tax Return (CT6000) and money owed paid nine months and one day after the end of the account period for the previous financial year. 

The rate of Corporation Tax is currently set at the following rates:

Subcontractors registered for the CIS are able to sign up for Gross Payment Status. 

Gross Payment Status means a subcontractor receives their wage in full, as a contractor deducts 0% from their earnings for CIS payments. 

Tax bills must instead be paid at the end of the financial year. This is done either through a Self Assessment tax return if registered as a sole trader or partnership, or a corporation tax return if registered as a limited company. 

Subcontractors must show HMRC the following to qualify for Gross Payment Status:

• They have paid tax and National Insurance on time in the past
• Their business does construction work (or provides labour) in the UK
• Their business is run through a bank account

HMRC will also look at turnover for the last 12 months, minus VAT and materials. Turnover must be £30,000 for sole traders, £30,000 for each partner in a partnership or at least £100,000 for the whole partnership and £100,000 for each director or at least £100,000 for the whole limited company. 

Providing false information may lead to a fine from HMRC. 

Registering for Gross Payment Status can either be done at the same time as registering for the CIS or at a later date by contacting HMRC. 

Contractors and subcontractors are able to claim back expenses for things used solely for business purposes. This could include mileage, fuel and the tools and equipment required for work. All allowable expenses must be included on the Self Assessment tax return. 

Expenses are deducted from overall income, meaning tax is only paid on profits. 

HMRC may ask for evidence of expenses so contractors and subcontractors should keep a thorough record, including physical or digital receipts, bank statements or mileage logs. 

A penalty may be issued by HMRC if an incorrect expense is claimed for. If unsure, HMRC recommends contacting their Self Assessment helpline to confirm whether a business cost is an allowable expense before submitting a return. 

Read more about how to pay tax as a contractor in our guide here.