Verifying and paying subcontractors in the Construction Industry Scheme

If you are a contractor carrying out construction operations, then you will need to register for the Construction Industry Scheme (CIS) with HM Revenue & Customs (HMRC) before you take on your first subcontractor.

Determining Employment Status

It is important to consider at this stage if you should employ the worker. A worker’s employment status isn’t necessarily a choice and will depend on a range of factors, including the terms of the contract, how they are paid, the level of control over their work and whether there is an obligation to find/accept work. HMRC have further guidance on a worker’s employment status: https://www.gov.uk/employment-status

If the worker is considered to be an employee, they would be taxed via the business payroll and CIS will no longer apply. If a worker is treated as a subcontractor and it is later established they are an employee, PAYE and National Insurance may need to be accounted for retrospectively and penalties/interest could apply.

Verifying Subcontractors with HMRC

On the assumption the worker is a subcontractor, they must be verified with HMRC before they can be paid. HMRC will then confirm whether they are registered for CIS and the rate to deduct from their payment.

The CIS deduction rates are 20% for registered subcontractors and 30% for unregistered subcontractors. If the subcontractor has gross payment status, then the CIS deduction will be nil.

To verify a subcontractor, you will require your Unique Taxpayer Reference (UTR) number, HMRC accounts office reference number and HMRC employer reference number. You will also require the subcontractors UTR number and National Insurance number if they’re a sole trader. If the subcontractor is a company, then you will require the company’s UTR number and Companies House registration number. If the subcontractor is a partnership, then you will require the nominated partner details, trading name and partnership UTR number.

The subcontractor can then be verified using the free HMRC CIS online service or other commercial CIS software is available. If you need to verify more than 50 subcontractors, commercial software must be used.

Calculating CIS Deductions

To calculate the CIS deduction, you must first deduct certain expenses from the gross payment. This includes VAT, equipment which is now unusable, fuel (except for travelling), equipment hired for the job and materials (if paid directly by the subcontractor). The CIS deduction rate advised by HMRC when verifying the subcontractor is then applied to the balance. The CIS deduction rate must be applied to all labour, tools which are still useable, and travel and subsistence costs charged by the subcontractor.

The gross payment less the CIS deduction calculated above is then paid to the subcontractor. The subcontractor must be given a payment and deduction statement within 14 days of the end of each tax month. The payment and deduction is reported to HMRC on a monthly basis via a CIS Return. The CIS deduction must be paid to HMRC by the 22^nd (or the 19^th if paying by post). Interest and penalties may be applied for late payment.

For more information on the Construction Industry Scheme please contact your local Perrys branch.