At Ryans, we understand that tax can be time consuming and, well, taxing, That’s why we have put together this helpful tax guide to simplify all the complicated information that you’ll need to know if you run a business in the construction industry.
When you operate a construction business, you will have to pay a number of different taxes including Corporation Tax, National Insurance (and other payroll taxes), Construction Industry Scheme (CIS) and VAT. If you are an owner-builder, you will also have to pay Council Tax and possibly Stamp Duty Land Tax (SDLT).
Most of these taxes must be paid to HMRC via a one-off Direct Debit payment, a bank transfer or by a debit card or corporate credit card (corporate credit and debit cards are charged a fee. There is no fee for personal debit cards.) It is no longer possible to pay Corporation Tax via the Post Office. Alternatively, you may also be able to file tax returns automatically if your business uses accounting software such as Quickbooks, Sage or Xero.
A key date to remember is the 6th April, which is the beginning of the financial year for most businesses. On this date, you can start filing your personal and corporate tax returns for the previous financial year, with the deadline of 31st January of the next calendar year, meaning the absolute latest you can file your taxes for the 2019-2020 financial year is 31 January 2021.
If you’re self-employed, this date is also the deadline for the first ‘payment on account’ for the previous financial year’s taxes. Payments on account are tax payments made twice a year to spread the cost of the year’s tax. The second payment is due on the 31 of July of that same year and the final payment is due on 31 January the following calendar year.
Corporation Tax for the Construction Industry
Corporation Tax is a tax that all limited businesses in the UK must pay on its profits. Your business’ profit is any money left over after you’ve deducted your expenses. Only limited companies pay corporation tax, meaning sole traders are exempt. The main corporation tax rate is 19% and is levied on all profits and chargeable gains (profits made when selling off company assets).
There are two parts to corporation tax filing: company accounts and company tax returns.
Calculating Your Annual Company Accounts
Every year, you must file an account with Companies House, including important information that follows strict guidelines such as a balance sheet, a profit and loss account and a signed directors’ report.
Balance Sheet
The balance sheet is an overall look at your business at the end of the financial year (usually the 5th April unless you have chosen a different end of year date) and includes cash, any debt you owe and are owed, investors’ money and assets such as property and equipment. You should take into account the depreciation of your assets (the loss of value over time)
A quick way to calculate the depreciation is by taking the asset’s purchase value, subtracting the salvage value (how much it will sell for when it’s no longer useful) and dividing it by the number of years you think it will be useful.
(Asset value – Salvage value) divided by the assets lifespan = Annual Depreciation.
For example a new combi drill may cost £150 and has an average lifetime of 5 years, and would likely sell for nothing if broken beyond repair.
This means after one year, the combi drill may only be worth £120.
Most accountants can work depreciation out for you and there are a range of other methods that can be used to work out depreciation, however, this method is the easiest for smaller businesses.
Profit and Loss Account
The profit and loss account is a look at your year’s activities, including your sales, other sources of income (e.g. investments) and how much money you’ve spent on running costs (including payroll and payroll taxes). It’s important to get this accurate as the amount of tax you pay depends on your profits and loss account.
To calculate your gross profits, use our handy online gross profit calculator.
The account doesn’t include any debts you owe or are owed or costs incurred from buying fixed assets. If your company is registered for VAT, any figures on your profits and loss account must exclude VAT as this goes on your VAT return. If your company isn’t registered for VAT, then all figures should include it.
For businesses with a high number of sales each day, you can make accounting easier by exporting them to a spreadsheet and importing them into accounting software such as Quickbooks, Sage and Xero.
Directors’ Report
The Directors’ Report is a document that is required by law and must be signed by the company director(s). It must include the names of the company partners, a brief description of the business and a declaration that the accounts comply with all UK laws.
Companies registered as a ‘micro-entity’ do not need to submit a directors’ report. Micro-entities are companies with fewer than 10 employees, a turnover of up to £632,000 and less than £316,000 on the balance sheet.
Filing Your Tax Return
Once you have calculated your profit and loss account, you can start to fill in your tax return which asks you to provide certain information including:
- Your turnover from trade made this tax year
- Any profits made or losses incurred this tax year
- Losses brought forward from the past
With these numbers, you can calculate your net trading profit.
You should also include information about loans, money owed by creditors, money you owe, money made through other means e.g. bank interest, gains on investments and sales of assets. It’s also important to make deductions where possible including management expenses, capital allowances, charity donations (made in the business name) and gains from selling property.
There are other deductions you can make that you’re likely to encounter whilst managing your business (listed on HMRC’s website).
Once you have entered these figures, either your accountancy software or the HMRC’s online form can calculate the tax you owe and any reliefs or credits you are eligible for. You are also able to claim back overpaid taxes.
If you’ve made a sale on any business property, equipment or other assets, you may have to pay Capital Gains Tax, meaning if you bought your property for £175,000 and sell it for £257,000, you’ll have to pay 28% tax on the £100,000 profit which is £28,000.
Tax as a Sole Trader or Partnership
If you are a sole trader, or are in a partnership where you have personal liability for your business then you are exempt from paying corporation tax and you don’t need to file accounts at Companies’ House. As there is no legal separation between yourself and your business, the money your business makes is classed as personal income, which you’ll have to pay income tax for instead.
Corporation tax is paid at a flat rate whereas income tax is progressive, which means that the percentage you pay increases depending on the amount you make. As of 2020-2021, the income tax bands are as follows:
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,500 | 0% |
| Basic Rate | £12,501 – £50,000 | 20% |
| Higher Rate | £50,001 – £150,000 | 40% |
| Additional Rate | £150,001+ | 45% |
Although the tax return you submit as a sole trader/partnership is simpler than the corporation tax document, you are still required to calculate your turnover, profits and expenses in a similar method.
Get Professional Assistance with Your Corporation Tax
Corporation tax represents a significant part of your trading costs and ensuring you are compliant with the law can hold a heavy burden, especially as reporting obligations increase, investigation policies from the tax authorities become more strict and penalties for non-compliance become harsher.
Efficient corporate tax planning can potentially result in large increases to your bottom line. Maximising your net profits whilst ensuring you’re complying with the law is a win-win.
Calculating your taxes and submitting your tax returns can take a great deal of time and resources, which is why we offer a range of services to help you minimise your corporate tax exposure and relieve you of the administrative burden. These services include:
- Determining the most tax effective structure for your business
- Taking full advantage of tax opportunities and reliefs
- Achieving the optimum capital or revenue tax treatment
- Reducing tax on disposals and maximising relief on acquisitions
- Making good use of tax opportunities specific to your industry
- Meeting the strict demands of compliance including corporation tax self assessment
- Acting on your behalf in discussions with the tax authorities
National Insurance, Payroll Taxes and the Construction Industry Scheme (CIS)
When it comes to paying the staff that work for you, the construction industry differs from most others as there is a set scheme in place called the Construction Industry Scheme (CIS). Before calculating wages, you first need to decide if your workers are employed or self-employed. If they are employees, then the normal PAYE rules, whereas self-employed workers must be paid according to the CIS.
Employees
Whether you’re a sole trader or limited company, every business must contribute to their Employers’ National Insurance contributions as well as their employees’ portion of National Insurance payments, income tax and student loan payments. This is all part of running payroll and is referred to as payroll taxes.
You must pay Employers’ National Insurance for employees who you pay over £157 a week. You must also count yourself as an employee, though if you pay yourself through dividends as opposed to, or as well as, payroll you’ll need to pay dividend tax. As of 2020-2021, the dividend tax bands are as follows:
| Tax Band | Tax Rate |
| Dividend Allowance (£2,000) | 0% |
| Basic Rate | 7.5% |
| High Rate | 32.5% |
| Additional Rate | 38.1% |
To calculate your dividend tax, use our handy online dividend tax calculator.
When running payroll, it’s incredibly important to have a diligent system in place. Whilst HMRC offers a basic system, it is limited in its abilities and can’t generate a payslip in the way advanced accounting software such as Quickbook, Sage and Xero can.
Once you’ve got an effective system in place, you’ll need to run payroll every month and provide your employees with payslips that detail their gross pay, PAYE deductions and their net pay. Student loan payments and pension contributions are deducted from employee payslips.
It’s a requirement of HMRC that you submit Full Payment Submission by 22nd of the month once payroll has run, which is a report containing information on the total amount you are paying your employees as well as the deductions. You must also pay the full balance for your PAYE taxes by this same date.
To calculate your payslips, use our handy online payslip calculator.
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How can our experts helpSelf-Employed and External Companies
Under the Construction Industry Scheme, all payments made from contractors (you) to subcontractors (the self-employed people who do work for you) must take account of the subcontractor’s tax status as determined by HMRC. This might mean you have to make a deduction from the payment (that doesn’t represent material costs the subcontractor incurred) which you then pay to HMRC. If no deduction is required, the contractor can make the payment to the subcontractor in full.
As a contractor, you must register with HMRC for the CIS so that they can provide registration details that will be needed when dealing with payments. If a deduction is required, you, as the contractor, must:
- Calculate the deduction
- Make the deduction
- Record the details of the payment, materials and deduction
- Make the net payment to the subcontractor
- Complete and give the appropriate statement of deduction to the subcontractor.
How to Calculate the Amount to Deduct
- Calculate the gross amount from which the deduction will be made. If the subcontractor is VAT registered, make sure to exclude any VAT they charge you. Keep a note of these gross payment amounts for when you come to do your monthly returns.
- Deduct the amount the subcontractor actually paid for the resources used in the construction operations from the gross payment. Resources to be deducted include:
- Materials
- Consumable stores
- Fuel (except for travelling)
- Plant hire
- Cost of manufacture or prefabrication materials
If your subcontractor is not VAT registered, make sure to include VAT when deducting.
How to File a Construction Industry Scheme Return
There are two ways you can make your monthly returns. You can either do it by using the free HMRC CIS online service or via commerical CIS software such as Sage and Xero.
How to Make a Construction Industry Scheme Payment to HMRC
You must pay the amount deductible to HMRC on a monthly basis and must pay the deductions due to be made each tax month within 14 days prior to the end of the month, whether or not the deductions have been made yet. If the payment is being made electronically, you have until 17 days prior to the end of the month. Make sure you do this on time as you could face penalties if you don’t pay in full by the deadline.
Get Professional Assistance with Your National Insurance, Payroll Taxes and Construction Industry
Administering your payroll can be time consuming and inconvenient, forcing you to redirect energy and resources from your business’ core activities. The task is made all the more tricky by the growing complexity of taxation and employment legislation as well as the accompanying regime of penalties for non-compliance.
HMRC claim that over 80% of data quality problems are caused by holding incorrect information about an employee’s name, date of birth or National Insurance number.
Under PAYE Real Time Information (RTI), the information that you submit to HMRC every time you pay your employees is matched against records HMRC stores on their National Insurance and PAYE Service (NPS).
Failing to run your payroll effectively can also lead to unhappy employees and no employer wants that added worry. If the records you submit don’t match, you may create duplicate or inaccurate records which could result in incorrect tax calculations or HMRC compliance checks.
Luckily, we have a dedicated team of trained staff at Ryans who can relieve you of this burden by providing a comprehensive and confidential payroll service, including:
- Customised payslips
- Administration of PAYE, national insurance, statutory sick pay, statutory maternity pay, etc
- Completion of statutory forms, including year end tax returns, to issue to your employees and submit to HMRC
- Summaries and analyses of staff costs
- Administration of incentive schemes, bonuses, and ex-gratia and termination payments
- Administration of pension schemes
Not only can we help with payroll, but we can also help you with filing your CIS returns by calculating deductions and ensuring you are fully compliant by submitting your returns and payments in full by the deadlines.
Even if you have only a few employees or subcontractors, you will make savings by hiring us to administer your payroll. We can help you to make sure the information you hold about your employees and subcontractors is correct, so you can avoid any unnecessary stresses.
VAT
If your construction company has a monthly turnover of £83,000+ in the last tax year, you must register for VAT, though you can also do this voluntarily if you earn less than £83,000. If you’re VAT-registered with HMRC, you have to document and add VAT to every transaction you make. You can also claim back VAT on business purchases.
There are 3 rates of VAT:
- 0%
- The reduced rate of 5%
- The standard rate of 20%
As your business is within the construction industry, you are most likely going to provide both standard and zero-rated services. VAT for most work on houses and flats by builders is charged at the standard rate of 20%, however, you may not have to charge VAT (0%) on work if it is building a new house or flat or if it is work for disabled people in their home. You may also be able to charge the reduced rate of 5% if you are:
- Installing energy saving products and work for people over the age of 60.
- Converting a building into a house or flats or from one residential use to another.
- Renovating an empty house or flat.
- Home improvements to a domestic property on the Isle of Man.
When generating invoices you must show your VAT number and information and show the ‘time of supply’ which is the date the transaction took place for when it comes to doing your taxes. You are able to reclaim VAT that you have paid for almost all business purchases and employee travel expenses so long as they are registered on your VAT return.
This return is submitted via HMRC’s Government Gateway and must include all invoices and receipts that you generate in that quarter and any import/export documents.
The best way to keep track is by using a dedicated VAT account. This account notes details of any applicable purchases or sales. Keeping this account up-to-date and allows you to calculate the VAT you owe HMRC and any VAT you can claim back.
Keeping your accounts in order is essential in the event that HMRC conducts an inspection. You must keep VAT records for at least 6 years (or 10 if you use the VAT MOSS service). They can be kept on paper, electronically or as part of a software such as Quickbooks, Sage and Xero.
To calculate your VAT tax, use our handy online VAT calculator.
Get Professional Help with Your VAT
The constant specific changes being made to VAT regulations and the ever growing demands of HMRC call for a trained professional eye to ensure that you do not fall foul of the regulations and end up paying the Exchequer more than you need to!
At Ryans, we provide an efficient cost effective VAT service, which includes:
- Assistance with VAT registration
- Advice on VAT planning and administration
- Use of the most appropriate scheme
- VAT control and reconciliation
- Help with completing VAT returns
- Planning to minimise future problems with HMRC
- Negotiating with HMRC in disputes and representing you at VAT tribunals
At Ryans, we know that the construction industry is one of the most volatile sectors in the UK and careful planning and advice is required to maintain efficiency and to stand out from your competitors. With years of experience in the construction sector, we pride ourselves on having an in-depth understanding of the specific problems those within the industry face, including builders, building and civil engineering contractors and consultants.
We work with you to optimise your performance with advice on funding, project planning, cash flow planning, payroll services and corporate tax planning, recommending the most effective solutions for your business.
To save yourself a job and potentially a lot of money, why not have a chat with us to discuss our Corporate Tax Planning service? Get in touch today by calling us on 01204 523263 or by leaving us a message.
Although we have tried to make this guide as comprehensive as possible, it is not a substitute for exhaustive professional help and advice. For more tips, information and tax guides, check out our helpful blog and resources.