Before you enlist the services of a subcontractor to help with your construction job, there are tax procedures that you need to have a good understanding of to avoid penalties. In this article, you’ll learn how the Construction Industry Scheme (CIS) works regarding the issue of paying subcontractors.
CIS traces its roots in the Construction Industry Tax Deduction Scheme introduced in 1971, which directly taxed payments by contractors to subcontractors. Because the original scheme was exploited for tax avoidance purposes, it was succeeded by the first version of the Construction Industry Scheme in 1999. The CIS has since been reformed, with the last significant change back in 2007.
The one major concern for today’s contractors regarding CIS is that they are responsible for income tax deductions on the payments they make to subcontractors. This includes paying HMRC for the deductions made.
Deductions are made on the subcontractor’s gross earnings. These serve as advance payments for the subcontractor’s income tax and National Insurance Contributions (NICs).
Who Falls Under CIS
Contractors are required to register for CIS if they meet either of these two conditions:
- They pay subcontractors to do construction work
- Their business isn’t in construction but they spend an average of over £1 million per year on construction work in any 3-year period
HMRC classify contractors who meet the first condition as “mainstream contractors,” while they classify those who meet the second as “deemed contractors,” such as housing associations and arm’s length management organisations (ALMOs).
Subcontractors are not required to register for CIS if they do construction work for a contractor. However, not being registered subjects them to a higher CIS deduction rate than registered subcontractors.
Construction work includes:
- Site preparation
- Demolition and dismantling
- Building work
- Alterations, repairs, and decorating
- Installing utility systems
- Post-construction cleaning of building interiors
As a general rule, CIS applies to construction work on permanent or temporary buildings or structures, as well as civil engineering projects like roads and bridges. CIS also covers businesses based outside the UK but still do construction work as contractors or subcontractors in the country.
You can be exempt from registering if you only do the following work:
- Architecture and surveying
- Scaffolding hire (with no labour)
- Carpet fitting
- Making materials used in construction
- Delivering materials
- Work on construction sites that is not construction such as running a canteen
How to Pay Subcontractors Under CIS
The first thing you need to do is to log in to the CIS online service, which allows you to send monthly returns and verify subcontractors. Logging in requires your email address, your Employer Reference Number (ERN), and your 13-digit Accounts Office reference number.
Verifying subcontractors lets you know if they have registered for CIS and what deduction rate you need to use (or if you don’t have to make deductions at all).
To verify a subcontractor, you need the following information from them:
- Unique Tax Reference (UTR)
- National Insurance Number if they are a sole trader (excluding temporary numbers)
- Company name, company UTR, and registration number if they are a limited company
- Nominated partner details, trading name, and partnership UTR if they are a partnership
The verification process applies to subcontractors you’ve previously worked with if you have not included them in a CIS return within the last two tax years.
Once you have verified your subcontractors and worked out what deduction rates to use, you can make the right deductions and pay them what they are due.
How to Make Deductions for CIS
Upon verifying a subcontractor, HMRC provides the appropriate deduction rate for that specific subcontractor.
The CIS tax deduction rates are:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% for subcontractors with gross payment status
You only make CIS tax deductions on labour costs. This means taking away all the other costs from the subcontractor’s gross invoice, including:
- Equipment that has been consumed
- Fuel used, except for travel
- Plant hire or equipment rental
- Manufacturing or prefabricating materials
Whatever is left is then subject to the proper CIS tax deduction rate.
The remaining amount is what you pay the subcontractor. If you have made any deductions, you are required to give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.
How to Pay HMRC for CIS
The deductions you’ve made on the payments to your subcontractors must then be paid to HMRC. Payment can be done through the same channels as paying PAYE and National Insurance. Online or telephone banking and CHAPS are the fastest ways to pay HMRC.
If you have employees and a current PAYE scheme, using subcontractors will make it so HMRC adjusts your existing PAYE scheme to include CIS deductions. This way, you can make all your necessary HMRC payments (PAYE tax, NICs, and CIS) in one go.
The deadline for submitting the CIS payments to HMRC is the 22nd of each month. Late payments result in interest charges and penalties that are in line with other late payments to HMRC.
If you won’t be making any payments for up to 6 months, whether it’s because you aren’t going to be using subcontractors or your subcontractors have gross payment status, request HMRC to change your scheme to “inactive” through the CIS online service.
Talk to Tax Experts Today
Although it is useful to learn all the details of CIS and paying subcontractors, it can be hard to keep track of each one without experience. Talk to one of our professional accountants today and get an expert to help with your tax responsibilities.