Any type of business, whether a sole trader, a partnership or a company, can be a Construction Industry Scheme (CIS) subcontractor.
A subcontractor is a business that carries out construction work for a contractor.
It is important to understand that CIS only applies to construction workers who are self employed. If a worker has a contract of employment, then they are an employee and will pay tax through the Pay As You Earn (PAYE) system instead.
So, in simple terms, if a business wins a construction contract and then uses an employee to fulfil the contract, the business is the subcontractor and falls within CIS, whilst the employee falls outside the scheme and is liable to tax under PAYE.
Registering for CIS as a subcontractor
Subcontractors should also register with HMRC for CIS.
Contractors will pay subcontractors either gross, net of the standard deduction or net of the higher deduction, dependent on the subcontractors’ tax status.
HMRC will approve a contractor to make a gross payment, if the subcontractor has satisfied the three tests laid down for qualification:
- Business test.
- Turnover test.
- Compliance test.
Detailed information on the three qualifying tests can be found on the HMRC website.
A standard deduction of 20% is made by a contractor, where the subcontractor is registered for CIS with HMRC and the contractor has been able to successfully verify the subcontractors’ details.
A higher deduction of 30% is made, when a contractor cannot verify the subcontractors’ details with HMRC. Typically the subcontractor is not registered and regarded as ‘un matched’ by HMRC.
Further details on registering for CIS as a subcontractor can be found on the HMRC website.
Subcontractors suffering deductions
Subcontractors who are limited companies can set off the deductions they suffer against the following sums:
- PAYE tax due from the company’s employees.
- Employers’ and employees’ National Insurance contributions (NICs).
- Student Loan repayments from the company’s employees.
- CIS deductions from the company’s subcontractors.
Other subcontractors, such as sole traders or partners within a partnership, reflect the CIS deductions on their tax returns and either set off the CIS tax deducted against their overall tax liability for the year, or claim a repayment if the CIS deducted is in excess of their tax liability for the year.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.