The construction industry makes use of different categories of workers, such as employees, independent contractors, and sub-contractors. There are differences in how these individual groups are taxed. We discuss the taxation that the law requires for each one and who is responsible for deducting it.
Employees
The ‘Pay As You Earn’ (PAYE) system is used to deduct taxable amounts from employees. These are staff members that you have hired to work for your company that you pay a salary or wages to. Employees are liable to pay National Insurance Contributions (NICs) and employees take this off their weekly or monthly earnings and pay these monies into HMRC (HM Revenue & Customs) on behalf of the staff member.
Independent Contractors
An independent contractor may have set up a limited liability company (LLC) or a partnership. With these types of companies, corporation tax must be paid.
An independent contractor can operate as a sole trader. This individual will pay a tax amount calculated on their profit for each year. This figure is derived by subtracting business expenses from the income they make.
Regardless of whether a contractor is an LLC, a partnership, or a sole trader, they can hire third parties as sub-contractors to help with a particular job. The business that hires an independent contractor is not responsible for deducting taxable amounts from these businesses or individuals as they are not employees being paid a salary or wage.
Sub-Contractors
The taxation process for sub-contractors seems a bit more difficult but is very simple.
A business may hire sub-contractors during a busy season to supplement their workforce without adding to their overheads in the form of wages and benefits. Sometimes, a specialist is needed for work that is outside the ambit of what the company does, for example, hiring a team of electricians to replace the wiring in their head office. At other times, a specific project needs diverse expertise, such as engineers, builders, and a scaffolding team. In all these instances, sub-contractors may be brought on board for a specified period only or until the job is completed.
The employer who hires sub-contractors will not be liable for deducting PAYE contributions. PAYE only applies to actual employees of your business. Although they will be carrying out work for your company and have to adhere to agreed terms and conditions, such as your safety regulations, they are not your employees. This is a clear distinction.
However, they will have PAYE deducted from their earnings. The difference is that the company that has hired sub-contractors will not be the party required to effect these deductions. This is the job of the sub-contracting firm that you have an agreement with to provide you with sub-contractors, who are their employees, not yours. You simply pay the sub-contracting firm the amount that was agreed upon for their services and you have no role in the taxation of their employees or their themselves. Essentially, they are independent contractors that make people available to businesses for an agreed project fee that is all-inclusive but has no tax implications.
The Construction Industry Scheme (CIS)
The Construction Industry Scheme (CIS) regulates sub-contractor tax.
Historically, HMRC dealt with tax evasion in this sector and sought to rectify this state of affairs. Thus, independent contractors are now required to conduct a quarterly tax deduction on sub-contractors, Previously, it was up to each sub-contractor to submit an annual self-assessment.
Whenever an independent contractor pays a sub-contractor, a proportion of this must be paid into CIS towards the sub-contractor’s tax liability. Once a year, the overall tax is calculated, and either more is taken from the sub-contractor to make up for a shortfall, or the sub-contractor is reimbursed if too much was deducted.
To understand, what is CIS accounting, an expert like AK Tax Accountants can assist with all requirements.
In the Republic of Ireland, all independent contractors in the former must be registered with the Revenue Online Service (ROS). The requirement came into effect in 2012. ROS is the avenue through which independent contractors submit their tax returns. Additionally, Republic of Ireland businesses in the construction industry, including sub-contractors, have to pay Relevant Contract Tax (RCT).
This guide makes it easy to grasp taxation in the construction sector in the UK and the Republic of Ireland.
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