Geoffrey Caesar, Solicitor

If you are a contractor in the construction industry, you may be wondering how the tax rules affect you. You may have heard of IR35 and CIS, but what are they, and how are they different?

IR35 is a shorthand term for the UK tax legislation that aims to prevent contractors from working as ‘disguised employees’ and avoiding paying the appropriate tax and National Insurance contributions (NICs). The legislation is also known as the ‘off-payroll working rules’ or the ‘Intermediaries Legislation’.

CIS stands for the Construction Industry Scheme, a special tax regime for contractors and subcontractors in the construction sector. Under CIS, contractors deduct money from a subcontractor’s payments and pass it to HM Revenue & Customs (HMRC). The deductions count as advance payments towards the subcontractor’s PAYE and NICs.

The main difference between IR35 and CIS is that IR35 applies to contractors who provide their services through their intermediary, such as a personal service company (PSC). In contrast, CIS applies to contractors who provide their services directly or through an agency. IR35 is based on the contractor’s employment status, while CIS is based on the type of work they do.

However, IR35 takes precedence over CIS, which means that if IR35 catches a contractor, they cannot use CIS to reduce their tax liability. IR35 treats the contractor as a deemed employee and taxes them through PAYE, while CIS only applies to self-employment and is essentially a holding tax.

The IR35 rules changed on 6 April 2021 for contractors who work for medium or large-sized clients outside the public sector and for contractors who work for public authorities. The changes mean that the responsibility for determining the contractor’s employment status for tax purposes has shifted from the contractor (or their intermediary) to the client. The client must provide the contractor with a Status Determination Statement (SDS) explaining their decision and its reasons.

If the client decides that the contractor is inside IR35, they (or the agency or other supplier that pays them) must deduct Income Tax and NICs from their fees and pay them to HMRC. The contractor will also have to pay the Apprenticeship Levy if applicable. The contractor can no longer claim certain expenses, such as travel and subsistence costs, as tax deductions.

If the client decides that the contractor is outside IR35, they can continue to operate as before and pay themselves a salary and dividends from their PSC. They will still be responsible for paying their Income Tax and NICs, as well as Corporation Tax and VAT if applicable. They may also be able to use CIS if they meet the criteria for being a subcontractor under the scheme.

It is essential to understand the difference between IR35 and CIS and how they affect you as a contractor in the construction industry. The rules are designed to ensure fairness and compliance in the tax system, but they can also have significant implications for your income and expenses.

Are you still determining your status, or do you need more information? I can provide guidance, review any documentation or status determination you have received and draw up any contracts you may require, whether working outside or inside IR35.