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If you are considering employing subcontractors to work with you, you will become a Contractor in the eyes of HM Revenue and Customs and will have to register with them under the CIS rules. This will require you to have a PAYE scheme set up and make monthly submissions to HM Revenue and Customs by the 19th of each month. The CIS return will include details of every subcontractor you pay between the 6th of the month to the 5th of the following month. For example the return submitted on 19th April will cover the period from 6th March to 5th April.
Every subcontractor needs to be registered with HMRC a) as a self-employed person and b) as a subcontractor for CIS. By registering as a subcontractor HMRC will allocate them with a tax status, this status defines how much the Contractor pays directly to the subcontractor and how much he deducts and sends to HMRC. Most subcontractors will have a 20% net deduction, although if they qualify, they could be allocated Gross status which means that no deduction is suffered by the subcontractor.
CIS is deducted from the labour element only, therefore, if a subcontractor has provided materials they will need to identify the split on their invoice. If the subcontractor is VAT registered the contractor does not reduce the VAT amount either.
For example Subcontractor A has a 20% net deduction status and invoices Contractor B as follows:
|Labour||£300.00||Deducts 20% £60.00|
|Materials||£110.00||Pays in full|
|VAT on £410.00||£82.00||Pays in full|
Therefore Contractor B will pay Subcontractor A £432.00, paying £60.00 to HMRC.
All subcontractors must be verified with HMRC by the Contractor before they begin work. In order to verify them, the contractor will require information from the subcontractor:
Sole Trader Unique Tax Reference (UTR) and National Insurance (N.I.) Number
Partnership The Partnership name, UTR and the name and NI Number of one of the partners
Company Registration number and UTR
The Contractor will be given the tax status to be applied together with a verification number. If HMRC are unable to identify the subcontractor they will be allocated the higher tax status of 30% deduction. The three possible tax treatments to be applied are:
20% net standard deduction
30% net higher deduction
Gross – no deduction required
After each tax month, you must then supply all of your subcontractors with their monthly CIS statements, which gives a summary of the payments made to them, split between labour and materials, and shows the amount of CIS deductions you have made for them.
If a Contractor pays a subcontractor without verifying the tax status and it turns out that they have been overpaid, the Contractor is liable for the shortfall of tax.
Penalties for late returns:
|How late the return is||Penalty|
|1 day late||£100.00|
|2 months late||£200|
|6 months late||£300 or 5% of the CIS deductions on the return, whichever is higher|
|12 months late||£300 or 5% of the CIS deductions on the return, whichever is higher|
CIS deductions are to be paid to HMRC every month by the 22nd (or the 19th if you're paying by post). You may be charged interest and penalties if you pay late.
Pay CIS deductions to HMRC in the same way as PAYE and National Insurance payments.
Some contractors also operate as a subcontractor themselves and therefore suffer a CIS deduction on their sales invoices. If this is the case then you only pay the net amount of CIS to HMRC, i.e. if the amount of CIS you have deducted from your subcontractors is more than the CIS you have suffered on your sales invoices, then a payment will be due to HMRC. However if your CIS suffered is more than you have deducted from your subcontractors then a CIS refund is due back to you. Any month where you have deducted more than you have suffered, a payment is due to HMRC by the 22nd of the following month, but any month where your CIS suffered is higher than your CIS deducted, this refund amount is carried forward and offset against any future months up until the end of the financial year of 5th April. At the 5th of April your CIS account then resets and you start again. You need to contact HMRC after the 5th April to reclaim any CIS refund due to you.
Get in touch on 01892 559480 to find out how we can help with your CIS needs.
Article written by Jenny Williams