As a contractor, your obligation is to deduct money from a sub-contractor’s payments and pass it to HM Revenue and Customs (HMRC).

Rules you must follow

1. Register as a contractor.
2. Check if you should employ the person instead of subcontracting the work. You may get a fine if they should be an employee instead.
3. Check with HMRC that your subcontractors are registered with CIS – this needs to be done by verifying each subcontractor prior to their first payment.
4. When you pay subcontractors, make deductions from their pay and pay to HMRC.
5. File monthly returns and keep full CIS records – penalties may apply if you do not.
6. Let HMRC know any changes to your business.

Register as a Contractor

Contractors must register for the scheme prior to paying any subcontractors, you must also be registered for PAYE, these can be done at the same time.

If you are already registered for PAYE, you can call the CIS helpline, 0300 200 3210,  to register you as a contractor quick and easily by giving your UTR and PAYE reference. 

Employee or subcontractor?

This is a detailed area, more information can be found from HMRC or speak with Nicola to determine if you have any queries. https://www.gov.uk/employment-status/selfemployed-contractor

CIS Verification

You must ensure your subcontractors are registered for Construction Industry Scheme (CIS) with HMRC. Once verified HMRC will advise on the rate of deduction.

You will need your subcontractors

• UTR
• National Insurance number if they’re a sole trader
• Company name, company UTR and registration number if a limited company
• Nominated partner details, trading name and partnership UTR if they’re a partnership

Deadline – verification must take pace prior to first payment to subcontractor

Making Deductions

The Construction Industry Scheme (CIS) deduction rates are:

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% if the subcontractor has ‘gross payment’ status - for example they do not have deductions made

You must pay these deductions to HMRC - they count as advance payments towards the subcontractor’s tax and National Insurance bill.

To make a CIS deduction from a subcontractor’s payment, start with the total (gross) amount of the subcontractor’s invoice.

Take away the amount the subcontractor has paid for:

• VAT
• equipment which is now unusable (‘consumable stores’)
• fuel used, except for travelling
• equipment hired for this job (‘plant hire’)
• manufacturing or prefabricating materials
• materials (only if they paid for them directly)

Finally, deduct the CIS percentage rate (as given to you by HMRC) from the amount left. You’ll be left with the net amount you need to pay the subcontractor.

For instance £1,000 @ 20% deduction rate

£1,000 x 20% = £200 tax to be deducted and paid to HMRC and the Subcontractor receives £800.

File Monthly Returns

This can be done via commercial software or CIS online service; you must declare on your return that the subcontractors are not employees.

If a subcontractor has Gross Status, you must still submit on your return.

If you have made no payments, you are still required to submit a nil return.

Deadline: returns must be filed by 19th of every month following the last tax period, 6th to 5th.

For instance a return made on 19th of June will be for the period 6th May to 5th June.

The period dates are for actual payments made to subcontractors, not invoices received.

Record keeping

You must keep records for 3 years of:

• Gross amount paid to each subcontractor, excluding VAT
• And deductions made from subcontractor payments

If you made deductions, you must keep records of cost of materials invoice you for, excluding VAT.

You may be fined up to £3,000 if you cannot show your CIS records when asked by HMRC.