What Sub Contractors Must Do
If you are a subcontractor in the construction industry, you need to follow the Construction Industry Scheme (CIS) rules set by HM Revenue and Customs (HMRC). The CIS rules apply to you if:
You do construction work for a contractor
Your business does not do construction work, but you have received payments from a contractor in the past 12 months
The CIS rules do not apply to you if:
You are an employee of the contractor
You only do certain jobs that are not considered construction work, such as architecture, surveying, scaffolding hire, carpet fitting, making or delivering materials, or running a canteen on a construction site
So, with exceptions, if you provide construction work for the end client, you are the Contractor.
With the exceptions, if you are hired to complete construction work in pursuit of fulfilling a contractor's construction contract with the end client, you are a Sub Contractor.
What are your benefits as a subcontractor under CIS?
As a subcontractor under CIS, you can:
Reduce your tax liability by claiming deductions for the cost of materials, VAT, and certain expenses
Receive payments from contractors without any deductions if you register for gross payment status
Avoid paying too much tax or National Insurance by submitting your Self Assessment tax return on time and claiming any reliefs or allowances
How to get verified by contractors?
Before a contractor pays you, they have to verify your details with HMRC. This is to make sure that you are registered with CIS and that they apply the correct rate of deduction.
You have to provide the contractor with:
Your name and UTR number
Your National Insurance number (or company registration number if you are a limited company)
HMRC will tell the contractor the rate of deduction to use for your payments. There are three possible rates:
0% - if you have registered for gross payment status, which means you pay your own tax and National Insurance
20% - if you have registered for standard payment status, which means you have passed some tests on your business turnover, tax compliance, and business structure
30% - if you have not registered with CIS or have not provided correct details
How to register as a subcontractor under CIS?
You can register as a subcontractor online using the CIS online service or by calling the CIS helpline. You will need:
Your business name and address
Your Unique Taxpayer Reference (UTR) number
Your National Insurance number (if you are a sole trader or a partner)
Your company registration number (if you are a limited company)
The name and UTR of any partners or directors
How to receive payments and deductions from contractors?
When a contractor pays you, they may deduct tax from your payment and pay it to HMRC. The deduction only applies to the labour part of the payment, not to the cost of materials, VAT, or certain expenses.
You can calculate the amount of deduction by following this formula:
Deduction = (Payment - Cost of materials - VAT) x Rate of deduction
You have to receive a payment and deduction statement from the contractor within 14 days of the end of each tax month. The statement must show:
The contractor’s name and business address
Your name and UTR number
The payment date
The gross payment
The cost of materials
The deductions made
The net payment
You have to keep records of all your payments and deductions for at least three years after the end of the tax year.
How to file your tax return and pay your tax and National Insurance?
You have to file your Self Assessment tax return every year by 31 January following the end of the tax year.
Your tax return must include:
Your personal details and UTR number
The total amount of payments received from contractors under CIS
The total amount of deductions made from your payments under CIS
The total amount of income from other sources, such as self-employment, employment, property, dividends, interest, etc.
The total amount of expenses and allowances that you can claim against your income, such as mileage, tools, equipment, home office, etc.
The total amount of tax and National Insurance that you owe or are owed
You have to pay your tax and National Insurance every year by 31 January following the end of the tax year.
How to apply for gross payment status?
If you want to receive payments from contractors without any deductions, you can apply for gross payment status. This means that you pay your own tax and National Insurance at the end of the year.
To qualify for gross payment status, you have to pass three tests:
Business test - you have to show that your business is run in the UK, has a bank account, and does construction work or provides labour for construction work
Turnover test - you have to show that your business turnover from construction work (excluding VAT and the cost of materials) is at least £30,000 a year (or £100,000 a year for partnerships and companies with more than one partner or director)
Compliance test - you have to show that you have complied with your tax obligations, such as filing your returns and paying your tax on time
You can apply for gross payment status online using the CIS online service or by calling the CIS helpline. HMRC will review your application and let you know if you are approved or not. You have to renew your gross payment status every year by 5 April.
AUGUST 2023
How We Help
When we handle your CIS Scheme as part of your accounts, we:
Can help generate your sales invoices to Contractors, indicating the necessary adjustments and deductions
Generate journals handling the CIS related items
Account for CIS deductions in your accounts
Reduce your Self Assessment Tax Due, or Claim Back overpayment of taxes when filing your Self Assessment Tax Return
Where you operate as a Limited Company and we operate your payroll, we can reduce your liability of payroll taxes to offset your CIS deductions