Builders & contractors
Contractors are required to register with HMRC and provide details of all their subcontractors. HMRC will then advise the contractor on how to pay their subcontractors. The payment could be made in one of the following ways:
Gross, with no deductions taken off their payment.
Net of a deduction at the standard rate of 20%.
Net of a deduction at the higher rate of 30%.
Contractors do not deduct National Insurance Contributions (NIC) or Student Loan deductions from subcontractors DMBM520025 Employer and Contractor Responsibilities.
Additionally, contractors must verify with HMRC whether a person to whom they are proposing to make a contract payment is registered under the Construction Industry Scheme (CIS). This verification is necessary before making any payments TC08925: KONSTRUCT RECRUITMENT LTD; RAJANBIR SINGH, Konstruct Recruitment Ltd and another v Revenue and Customs Commissioners.
If an appeal is logged against a change of tax treatment from gross to net, HMRC will suspend any action to change the subcontractor’s tax treatment from gross to net where cancellation is made with notice. If the appeal is received and accepted after the 90-day notice period, HMRC will reinstate the gross tax treatment and inform the relevant contractors CISR48010 Introduction.
Contractors are also responsible for paying over the tax withheld to HMRC within 14 days from the end of the tax month (the 19th of each month). If the payment is made electronically, the deadline is extended by three days. Payments can be made quarterly if the average monthly tax payment is less than £1,500 CIS ― compliance.
The Construction Industry Scheme (CIS) was devised to limit the amount of tax lost due to under-declarations or failures to notify chargeability by subcontractors, many of whom came to work in the UK for relatively short periods without paying any tax. The scheme operates to withhold tax at source at the point of payment, thereby reducing the risk of a subsequent default by the subcontractor. If the subcontractor can prove compliance with their tax obligations and meets certain other tests, they can receive payments gross CIS ― overview, CIS ― contractors, CIS ― subcontractors.
Under the CIS, tax deductions apply to the net amount of a payment after deducting the cost of any materials. However, any part of a payment attributable to the subcontractor's travel expenses is subject to tax deduction. The gross amount of the payment is calculated by excluding VAT and any Construction Industry Training Board (CITB) levy. From the gross amount, the net (VAT-exclusive) cost of materials, consumable stores, fuel (except fuel used for travelling), plant hire, and any costs of manufacture incurred in respect of the materials are deducted. From 6 April 2021, only materials costs which the subcontractor has purchased directly may be deducted E5.546C Construction industry scheme—payments to subcontractors.
Recent legislative changes include the introduction of checks on VAT compliance as part of the issue and renewal of gross payment status certificates, effective from 6 April 2024. This change aims to counter 'supply chain fraud' by organized crime groups who create false invoices to circumvent CIS deductions and VAT requirements. Minor VAT compliance failures will not be considered for this purpose. However, if a subcontractor already holds gross payment status before 6 April 2024, any VAT non-compliance prior to that date must be disregarded by HMRC when determining whether to withdraw gross payment status CIS ― subcontractors.
The CIS also includes penalties for late payment, returns, or incorrect registration. The Finance Act 2021 introduced legislation to prevent non-compliant businesses from using the CIS to claim tax refunds to which they are not entitled. HMRC can reduce or deny CIS set-off credit claimed on employer returns where the subcontractor cannot evidence the deductions and does not correct their return when asked CIS ― compliance.
Contractors are responsible for verifying the status of their subcontractors with HMRC, including whether they are registered for gross payment, payment under deduction of tax, or not registered at all under the CIS scheme E5.542D Construction industry scheme—verification of subcontractor payment status.