In the UK tax landscape, construction workers must understand two key frameworks: IR35 and CIS. IR35 targets tax avoidance or reduction by ensuring Contractors working like employees pay similar Income Tax and National Insurance.

Meanwhile, CIS is a framework for deducting tax at source from certain payments relating to construction work as a way of countering the informal arrangements perceived to exist in the construction industry and its poor record of tax compliance.  

This article will provide a concise overview of IR35 and CIS, highlighting their differences and implications. Whether you are new to contracting or have years of contracting experience behind you, this guide will help you navigate these regulations and make informed decisions for your business. 

IR35 considerations – When does Off-Payroll Working apply?

 IR35 legislation applies where an individual worker is providing their services to an end client via an intermediary, such as a personal service company (PSC). The working practices and the Contract are key in identifying whether the engagement between the Contractor and the Company, would be caught by the IR35 legislation or, would indicate a legitimate business to business relationship. Key considerations include the degree of supervision, direction and control the client has over the Contractor’s work, the financial risk borne by the Contractor, the provision of equipment, and the overall nature of the contractual relationship. 

Determining IR35 status

Under the IR35 Off Payroll rules, the end client is responsible for determining whether a worker’s engagement falls “inside” or “outside” IR35 by completing a Status Determination Statement (SDS). This assessment must be based on both the contract in place and the actual working practices to reach a compliant determination. The criteria to be considered includes:  

• Mutuality of Obligation (MOO): Whether there is an obligation for the end client to provide work and for the worker to accept it. 
• Supervision, Direction, and Control (SDC): The degree of control the end client has over how, when, and where the worker performs their tasks. 
• Substitution: Whether the worker can send a substitute to complete the work. 
• Financial Risk: Whether the Contractor bears any financial risk in the engagement. 

If the engagement is determined to be inside IR35, the “fee-payer” must deduct income tax and National Insurance contributions. The fee-payer is the party closest to the PSC in the contractual chain, which could be the end client or another intermediary, such as an agency. 

Crucially, if the end client fails to comply with Off-Payroll requirements or makes an incorrect determination, HMRC may pursue them for unpaid taxes and potentially impose fines or other penalties. 

Understanding CIS

The Construction Industry Scheme (CIS) is a tax framework specifically designed for the UK construction sector to streamline tax payments and improve compliance. CIS applies to all Contractors and Subcontractors, including Sole Traders, Partnerships, and limited companies, working within the mainstream construction industry. In the context of CIS, the terms “Contractor” and “Subcontractor” have specific definitions distinct from their common usage in the recruitment sector. “Contractors” under CIS can include entities such as property developers, local authorities, and housing associations that spend £1 million or more annually over a three-year period on construction work. 

Under CIS, Contractors deduct money from Subcontractors’ payments. These deductions serve as advance payments toward the Subcontractor’s tax and National Insurance contributions. Contractors must register for CIS, verify Subcontractors’ status, and handle deductions and payments accurately. Failure to comply with CIS regulations can result in significant penalties, making it essential for those in the construction industry to understand their obligations and maintain meticulous records. 

IR35 or CIS – Which one applies? 

Determining whether IR35 or CIS applies can be a complex decision requiring careful consideration. Generally, CIS applies to Contractors and Subcontractors engaged in construction work, necessitating tax deductions at source. However, if a Contractor operates through an intermediary, such as a PSC, IR35 rules must be evaluated to determine if the Contractor is essentially working as an employee. Key considerations include the nature of the contractual relationship, control, financial risk, and the tools provided for the job. Contractors must assess their working practices against both CIS and IR35 criteria, often consulting with a tax adviser to ensure compliance. By understanding the specifics of each framework and their respective implications, construction Contractors can make informed decisions, ensuring they adopt the correct tax approach and avoid potential legal and financial repercussions. 

Navigating IR35 and CIS

Understanding the nuances of each of these frameworks is essential, with IR35 requiring a careful assessment of working relationships and contractual terms, while CIS involves specific obligations for tax deductions and payments. Both frameworks carry potential risks and penalties for non-compliance, making it imperative for Contractors to thoroughly understand their responsibilities. 

Given the intricate nature of these regulations, seeking professional legal and tax advice is highly recommended. Expert guidance can help Contractors navigate these laws effectively, ensuring compliance and optimising their financial outcomes. By staying informed and proactive, Contractors can successfully manage their tax obligations and focus on growing their business. 

Learn more

• Navigating going from inside to outside IR35 as a Contractor
• IR35 flowchart for Contractors