IR35 & CIS: which one applies to you?
There’s particular confusion in the construction industry from the conflict between IR35 and the CIS (Construction Industry Scheme) for tax deductions.
In this article, we’ll try to clarify the difference between them and when they apply.
What’s IR35, and when does it apply?
IR35 (or off-payroll tax rules) is a piece of UK tax regulation created to identify employees and ensure they are taxed correctly.
Specifically, it was introduced to face the issue of contractors setting up limited companies to benefit from its tax advantages.
After IR35 came into force in 2000, contractors judged as employees (inside IR35) have to pay tax at the equivalent rate of any other industry’s employee. In this case, the client or agency has to take care of taxes on the contractor’s behalf.
On the other hand, if they’re outside IR35, they’re considered self-employed, therefore, responsible for working out their taxes.
From April 2017, the liability for determining the contractor’s employment status (inside or outside IR35) is of the client or recruitment agency. However, this will change from April 2023, when contractors will be.
How to determine your IR35 status
Understanding whether you’re inside or outside IR35 can be difficult to determine without professional help because it isn’t a simple checklist but a mix of factors to consider.
The main factors to consider are:
- Personal service: if the service provided is personal or business-to-business.
- Control: to what extent the client/agency controls the service provided.
- Mutuality of obligation: to what extent the client is obliged to consistently provide and pay for work or you to accept it.
- Financial risk: who’s liable for any fault or unsatisfactory work.
- Part and Parcel (of the client organisation): you're a necessary part of the business.
As stated above, determining one’s IR35 status is quite complex. However, there’re generally different indicators of outside or inside IR35 contracts.
- No right to provide a substitute for your work
- Obligation for your client to provide and pay for work and for you to accept it
- Your contract has no fixed start or end dates
- Your client decides how, where and when you have to provide your services
- Right to provide a substitute
- The contract has a start and end date
- Your client doesn’t control you; you have the freedom to carry out the work as you think is best
- You’re not part and parcel of your client’s organisation and don’t enjoy employment benefits
- You carry financial risk and are liable for mistakes
If you work in the construction industry and IR35 doesn’t apply to you, then you should consider CIS and its rules.
Note that IR35 rules take precedence over CIS and must be considered when dealing with construction contracts.
What’s CIS, and when does it apply?
CIS (short for “the Construction Industry Scheme“) was set up by HMRC to collect income tax throughout the year from people working in the construction industry.
Construction companies deduct tax on behalf of their workers (subcontractors) and send the money to HMRC as tax payments:
- 20% for workers who have registered themselves as subcontractors with HMRC
- 30% for those who have not
Note that CIS only applies if you work in construction as a subcontractor and you have registered for CIS – here is how you do it.
CIS covers contractor services on most construction work to permanent or temporary buildings/structures and civil engineering works (such as roads and bridges).
Specifically, construction work includes:
- Preparing the site (e.g. laying foundations and providing access works)
- Demolition and dismantling
- Building work
- Alterations, repairs, and decorating
- Installing systems for heating, lighting, power, water, and ventilation
- Cleaning the inside of buildings after construction work