VAT and CIS responsibilities for Sole Trader Subcontractors can be very confusing with many not understanding their obligations, or are aware they have any obligations at all. This article will cover everything you need to know about the responsibilities and obligations Sole Trader sub-contractors.
What is VAT and When Do I Register?
VAT (Value Added Tax) is a tax added to most products and services sold by VAT-registered businesses. In accordance with the GOV.UK website, you must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
However, VAT for subcontractors is ‘reverse charge’ – this essentially means that they don’t have to pay over VAT, but they do still need to be registered &they can therefore claim VAT on their purchases.
What Is CIS?
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).
The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
Contractors must register for the scheme. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
CIS is deducted at source and will be offset against tax payable at the end of the tax year when self-assessment is submitted. Then there will either be a balance payable or refundable depending on profits for the year.
For more information on CIS please visit the GOV.UK website.
Are VAT and CIS Related?
Some subcontractors can often confuse CIS deductions with VAT as the rates are similar, however they are two unrelated obligations and as a subcontractor you ensure you are meeting BOTH . Please see below the list of obligations below relating to VAT and CIS.
- Must get main contractor VAT number
- Must get evidence of main contractor CIS registration (should receive subcontractor payslip detailing companies UTR number)
- Invoices to customers should detail £0 VAT but state that VAT is applicable but subject to reverse charge
- Keep records, need evidence of everything that VAT can be claimed on as proof
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