Understanding which expenses are allowable for tax purposes is very important for contractors and subcontractors who work under the Construction Industry Scheme (CIS). Many new subcontractors don’t know what expenses they can claim. Therefore, they may end up paying too much tax or face compliance issues with HMRC.
This guide explains the expenses allowable for subcontractors working under CIS, how to claim them, and other regulations specific to CIS contractors and subcontractors.
What is the CIS?
The Construction Industry Scheme (CIS) is a system created by HMRC to oversee taxation for construction workers. The scheme requires contractors to deduct a percentage of tax from all payments made to a subcontractor, including payments for materials, and send the money directly to HMRC.
All subcontractors must keep thorough records and report on their earnings. This enables them to claim allowable expenses against their taxable profits. By understanding allowable expenses, a subcontractor can reduce their taxable profits and thus lower their tax obligations.
What are Allowable Expenses?
Allowable expenses are costs incurred while conducting business activities, which can reduce your taxable income. To qualify as allowable expenses, all of the following must apply:
- They are incurred entirely and exclusively in relation to CIS work
- The costs are both reasonable and necessary
- These costs must be documented via receipts or invoices.
When these expenses are deducted from your taxable income, your taxable profit decreases accordingly, resulting in lower taxes owed and lower payments made towards National Insurance.
Common Allowable Expenses for CIS Subcontractors
Here’s a breakdown of typical expenses you can claim as a CIS Subcontractor:
Tools and Equipment
If you use hand tools, power tools, safety gear, or protective clothing for work purposes, you may be able to deduct these items from your income tax return. Tools that cost less than 200 may be deducted in full on your tax return for the year of purchase. More expensive tools must be claimed over time using capital allowance.
Materials
You can claim expenses for materials purchased specifically for a job if you maintain records of the invoices to verify them with HMRC in the event of a dispute.
Vehicle Costs
If you use a vehicle for work, you may claim expenses such as fuel, parking fees, insurance, and maintenance for business use. Accurate mileage records are essential if you use the simplified mileage method.
Travel and Accommodation
Costs for travelling between different job sites can be claimed, along with accommodation and meals when you are required to stay away from home for work. Normal daily commuting costs are not allowed.
Insurance
Expenses for public liability insurance, professional indemnity insurance, and tools used for business purposes can all be claimed.
Subcontractor Training
Claimable expenses also include courses or certifications required for your role within CIS.
What Expenses Are Not Allowable?
It is also important to know what expenses are not allowable to be claimed, which include:
- Your own clothing or meals that aren’t for work.
- Any fines or penalties that have been issued to you.
- Commuting costs to your usual place of work.
- Any travel or vehicle expenses incurred while not working.
If you claim an expense that is not allowable, you could incur penalties from HRMC.
How to Claim Allowable Expenses
1. Keep an Accurate Record
Keep all expense documentation, such as receipts, invoices, and mileage logs, as HRMC may request proof of these expenses during an audit.
2. Report Through Self-Assessment
A subcontractor will typically only submit their allowable expenses through their self-assessment tax return, allowing you to lower your taxable income.
3. Use Accounting Software
Software tools such as QuickBooks, Xero, or FreeAgent can help you track your expenses and make it easier to distinguish between personal and business expenses.
Tips for CIS Subcontractors
- Keep your business finances separate from your personal finances to help make things clearer.
- Check the HRMC website regularly for updated information on allowable expenses so you don’t make mistakes.
- Ask an accountant for help if you have many different types of expenses or several jobs.
- You should only claim what you actually spent money on; claiming more than you actually spent may result in a fine or an audit.
Conclusion
CIS Subcontractors must have a clear understanding of what expenses they can claim. A correctly claimed expense will be deducted from taxable profit, complying with HMRC regulations, and may enable you to keep more of your income. Subcontractors need to keep accurate records and stay up to date with the latest information regarding allowable tax deductions on tools, materials, travel expenses, and professional liability insurance. If you maintain good organisation and remain vigilant, you will be able to concentrate on your work and only pay tax on what you actually owe.