If the end client finds your contractors to be inside IR35, PAYE tax and NICs will need to be deducted from payments made to their limited companies. Many recruiters are looking for a way to allow their contractors can continue to enjoy the benefits of self-employment, and the construction industry scheme (CIS) often comes up as a potential solution. So, when it is advisable for contractors to switch to CIS as a solution for IR35 reform?
Are they suitable for CIS?
There are two questions to ask here: are your contractors working in construction, and are they genuinely self-employed? If they can answer yes to both of those questions, then switching to CIS may be a viable solution.
Are they working in construction?
CIS applies if your contractors are engaged to carry out construction work to either buildings/structures, or civil engineering works like roads and bridges. As a construction recruiter you’ll be in a good position to advise if the work falls inside the scope of CIS.
Are they self-employed?
This is a slightly more involved question, and it’s important that you get it right because you as the recruiter will be liable for any unpaid tax and NICs if you engage contractors on a self-employed basis when they should be classed as employed. Before you suggest that your contractors switch to CIS, you’ll need to establish that the client has no right to supervision, direction or control (SDC).
If your contractors would have been outside IR35
There are circumstances where contractors who are genuinely in business on their own account, and therefore would be outside IR35 if assessed correctly, could find themselves working as if they were inside IR35. For example, if the end client has made a blanket “inside” decision or has decided to refuse to work with PSCs as a matter of policy.
In this case, there’s a good chance that your contractors will be outside SDC, meaning that CIS self-employment could be a viable solution.
If your contractors are inside IR35
If the end client has assessed your contractors’ IR35 status correctly and found them to be inside IR35, it’s less likely that they’ll be outside SDC. The tests are not the same, and it might still be worth conducting an SDC test to be sure, but broadly speaking if an IR35 assessment finds your contractors to be employed for tax purposes, the SDC test probably will as well. In this case, umbrella employment is likely the best solution for your contractors.
Questions your contractors might ask
Registering for CIS
If they’re switching from their own limited company to CIS, your contractors will need to register for CIS. It’s likely that they’ll have already registered for self-assessment, but if not, they’ll need to do this as well.
How CIS works
Flat rate deductions will be made from the contractor’s rate before it is paid to them – once they’ve registered for CIS 20% will be deducted, before registration the deduction will be 30%. These deductions will function as an advance payment to HMRC against tax owed by the contractor. At the end of the tax year, the contractor will complete a self-assessment tax return and will either pay any outstanding tax or receive a refund. Any expenses the contractor needs to claim will be included in their self-assessment.
Do they need to close their limited company?
This will depend on their future strategy and plans. If they intend to continue trading as CIS self-employed contractors, then they might want to close their company. If they’re intending to target contracts where they’ll have the opportunity use their company and trade outside IR35, it’s obviously more likely that they’ll want to keep it. Either way, we’d suggest that they have a detailed discussion with their accountant about if, when and how their company should be closed.
If you have any questions or if we can help in any way, please call our expert team on 01296 468 483 or email firstname.lastname@example.org