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If you are a contractor and you want to engage somebody to work for you, you must first establish whether or not the type of work involved falls within the construction industry scheme. The CIS guide for contractors and subcontractors explains in full what type of work is covered by the CIS.
Once you are satisfied about the status of the work, you need to obtain basic details from the subcontractor, such as name, unique taxpayer reference (UTR) and national insurance number.
If you use subcontractors who do not trade as limited companies, the first priority is to establish whether, in all the circumstances, they are entitled to be treated as self employed. This matter is discussed in our fact sheet An Introduction to PAYE. All wages for employees must be paid under PAYE.
If you believe your worker should be categorised as self employed, you need to set up an appropriate contract. The next stage is Verification.
You can verify a subcontractor by:
You also need to establish whether the subcontractor is to be paid gross or net. For net payments there are two rates of deduction – a standard rate (20%) for those who have registered with HMRC (“matched”) and a higher rate (30%) for those who have not (“unmatched”).
Please note that the verification process should be used only when a contract is in place, or a tender accepted. It cannot be used speculatively to establish payment status details of a subcontractor.
Contractors must issue a payment statement to each subcontractor for whom they have made a deduction from a payment. The statement may cover all payments in a tax month, or each individual payment. There are penalties if payment statements are not issued within 14 days of the end of the tax month. There is no prescribed format, but they must contain the following information:
Care should be taken when using standard payroll statements, as they often have inappropriate headings, such as “employee number”. It is important that payment statements clearly identify the subcontractor as a self-employed individual rather than an employee.
To make a deduction from a subcontractor’s payment, start with the total – gross – amount of the subcontractor’s invoice and then take away:
Then take away the amount the subcontractor actually paid for:
Include VAT if they are not VAT registered.
Finally, apply either the standard or the higher rate percentage to the amount left – this gives you how much to deduct.
Once you know how much to pay the subcontractor you’ll probably pay it directly to them. But they could authorise you to pay a third party like a debt factor.
Keep a record of every payment you make to each subcontractor. Include details of:
Contractors must also make monthly returns of all payments to subcontractors, showing for each subcontractor most of the details shown on the payment statements, together with declarations that:
Returns and payments must reach HMRC within 14 days of the end of the relevant tax month. There will be penalties if these are late or incorrect.
The penalty will be cancelled if you let HMRC know that you didn’t pay any subcontractors that month.
Nil returns must be made if no subcontractors have been paid in the month. There are no annual returns.
How late the return is
|1 day late||£100|
|2 months late||£200|
6 months late
|£300 or 5% of the CIS deductions on the return, whichever is higher|
|12 months late|
For returns later than this, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.
Remember, you could be fined up to £3,000 if you can’t show your CIS records when asked by HMRC.