If you are paying subcontractors in the construction industry, you will likely be aware of ‘CIS’ (Construction Industry Scheme).
Under this scheme you must usually deduct tax from your subcontractors and hand this over to HM Revenue & Customs each month. With this comes several responsibilities.
I am about to pay my first subcontractor – what do I need to do?
- Firstly look at the arrangement you have with your subcontractor.
Are they truly a subcontractor, in business in their own right, or are they actually an employee?
This can be a difficult area so if you are unsure, it’s worth chatting to a professional (such as ourselves) for guidance.
- Presuming they are a subcontractor; you must register for CIS.
To do this you first need to register as an employer. This sounds odd as you have just decided you aren’t an employer. An ‘employer’ scheme is needed because you will need to report deductions and pay tax over to HMRC.
You can do this here.
If you follow the prompts there is a good tool to guide you on how to register.
I’ve done that, what next?
Once these details arrive you may need an additional step of calling HMRC CIS helpline to register as a contractor (0300 2003210). Depending on your type of business and how you registered this step may not be needed.
- ‘Verify’ them before you take steps to paying subcontractors. You can do this via HMRC’s free tool.
- You will need to sign up for this the first time you use it, having your ‘Employer Reference’ / ‘Accounts Office Reference’ to hand (this is the info from step 2).
- Log in and follow the steps to add and verify your subcontractor. You will need from them:
- UTR (Tax Reference) & National Insurance Number (if they are a Sole Trader
- Company name, UTR and Registration Number (if they are a Limited Company)
- Nominated Partner’s details and URT (if they are a Partnership)
At the end of this process the HMRC tool will return a result that tells you whether you should deduct ‘Standard (20%)’ tax from them. There is a ‘Gross’ result which means no tax and a ‘Unmatched/Higher rate’ result than mean you need to deduct 30% when paying subcontractors.
Do I take tax off the entire payment?
HMRC have some guidance on this, here.
In short, you usually only take the tax from the labour element of their invoice (so ignore the materials element when calculating the tax deduction).
Do I need to give the subcontractor anything?
The most important bit of paper they will want for their own tax is a deduction statement.
Make sure you supply this to them within 14 days of the end of each ‘tax’ month. A simple template for this can be found here.
What do I have to tell the taxman?
Each month you need to file a Contractors Monthly Return. This needs to be submitted before the 19th of each month or you will receive a £100 instant fine.
Submit your return through the same HMRC tool and log in used to verify your subcontractors. You still need to do this return each month once you’ve registered as an employer, even if you have not paid any subcontractors.
If you don’t expect to pay subcontractors for a while, you can do an ‘inactivity request’ within the tool that will exempt you for time.
How do I pay the taxman?
You need to pay by the 22nd of each month (19th if by post). The easiest way to pay is via your online banking, using your Accounts Office Reference Number.
Details of how to pay are here: https://www.gov.uk/pay-paye-tax
If you are a limited company and subject to CIS deductions yourself, you can offset the CIS you need to hand over against the amounts that have been deducted from your payments in the period. Keeping good records is essential, this is a tricky process!
If you are a limited company, you also need to report your own deductions that have been made from payments to you. This is done via payroll software (a report known as a EPS) each month. This is vital to do each month as you can end up incurring interest charges from HMRC (the detail on why this can occur is outside the scope of this article!).
Sole trader? The deductions made from your payments cannot be offset in the month. However, you can claim this tax against your tax bill each year in your personal Self Assessment Tax Return.
Phew, this sounds like a lot of work…
Well.. it is. It is also fraught with potential areas to slip up and receive penalties. If you are concerned about managing this, please get in contact with us and we can take the pain of CIS away!