Potentially verifying every single subcontractor could be a laborious process for a contractor, especially if the subcontractor involved is known by the contractor. In recognition of this, HMRC does not require a contractor to check a previously verified subcontractor who has been included on a return made by the contractor in the current tax year, or in either of the previous two tax years.
A full description of the verification process is available on the HMRC website.
When a contractor has verified the tax status of a subcontractor with HMRC, a standard or higher deduction may need to be made. Once advised of the rate of deduction to be applied by HMRC, the contractor will need to provide a payment and deduction statement (PDS) to the subcontractor.
The PDS must include:
- The contractor’s name and employer’s tax reference.
- The end of the tax month in which the payment was made (e.g. 5 July 2013).
- The subcontractor’s details, including their name and Unique Taxpayer Reference (UTR).
- The gross amount of the payment made and the amount of the deduction.
If a deduction is required, the contractor must apply the standard or higher rate to the gross amount, including subsistence or travelling expenses, but exclude the following:
- Value Added Tax (VAT) charged by the subcontractor, if the subcontractor is registered for VAT.
- Any amount equal to the CITB-Construction Skills levy that the subcontractor has agreed may be deducted from their payment.
- The amount the subcontractor spent on any materials used in the construction operations.
Practical examples of deductions from subcontractors’ payments can be found at Appendix D (pages 72-77 inclusive) of the HMRC CIS340 booklet called Construction Industry Scheme – Guide for contractors and subcontractors.
In summary, the contractor should:
- Calculate the deduction.
- Make the deduction.
- Record details of the payment, materials and deduction.
- Make the net payment to the subcontractor.
- Complete and give a PDS to the subcontractor.
An example of a PDS can be found at Appendix E (page 78) of the HMRC CIS340 booklet ( http://abytx.co/12fUdoT).
There is no obligation to provide a subcontractor who has been paid gross with a form of payment statement, but it is good practice to do so, in the event of any future business records check or enquiry by HMRC.
Each month contractors must send HMRC a complete return of all payments made in the preceding month, within 14 days of the end of the tax month to which they relate.
Failure to meet the deadline for submission results in automatic penalties.
Contractors must also pay the amounts deductible to HMRC within 14 days of the end of the preceding tax month, or within 17 days where payment is being made electronically.
From May 2010, contractors may have to pay penalties if they do not pay the amounts due on time and in full.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.