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If your business operates as a contractor under the Construction Industry Scheme (CIS) then there are certain steps you must take when you pay subcontractors for construction work covered by CIS. These include verifying new subcontractors, working out the right amount to pay them, and keeping proper records and paperwork.
This guide will help you follow the correct procedures when you pay your subcontractors. It includes an overview of the steps you need to take and guidance on how to go about it.
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You may need to 'verify' a subcontractor with HM Revenue & Customs (HMRC) before you first pay them. Verification is the process of checking with HMRC whether your subcontractor has registered under CIS and what their tax status is.
Before you verify a subcontractor, make sure the contract between you means that they're really self-employed. If the contract's a 'contract of employment' then they're an employee and CIS doesn't apply. You can download a factsheet from the HMRC website to help you decide whether your workers are employed or self-employed. The fact that a subcontractor is registered for CIS does not mean that they are self-employed.
Find out more about whether your subcontractor is classed as employed or self-employed
As a general rule, you'll need to verify a subcontractor if you haven't included them on a monthly CIS return in the current tax year, or in one of the two tax years before that. A tax year runs from 6 April in one year to 5 April in the next.
To verify a subcontractor you need to contact HMRC by:
Whichever way you choose, you'll need to have certain information ready. You'll need the following details about yourself to hand:
You'll also need the following information about the subcontractor:
Finally, you'll need to be able to confirm that you've agreed a contract with the subcontractor, or that you've formally accepted their contract tender.
HMRC will check these details against their records, confirm whether the subcontractor's registered, tell you how to pay them and give you a verification reference number. You'll get a slightly different type of reference number if HMRC can't verify that the subcontractor's registered with them, and, in that case, it's very important to keep a note of it.
Use HMRC's online services to verify subcontractors
When HMRC verify a subcontractor, they'll tell you how to pay them. This could be:
If you don't need to verify a subcontractor because you've included them on a previous CIS return you should pay them the same way you paid them last time. HMRC will let you know if they change a subcontractor's payment status.
To make a deduction from a subcontractor's payment, start with the total - gross - amount of the subcontractor's invoice and then take away:
Then take away the amount the subcontractor actually paid for each of the following (including VAT if they're not VAT registered):
Finally, apply either the standard or the higher rate percentage to the amount that's left to work out how much to deduct.
Once you know how much to pay the subcontractor you'll probably pay it to them directly. But they could authorise you to pay a third party like a debt factor.
Keep a record of every payment you make to a subcontractor. Include details of:
The deductions that you take from a subcontractor's pay will need to be paid over to HMRC. To find out more about how to make payments to HMRC, follow the link below.
How to pay CIS deductions to HMRC if you're a contractor
You must give a written statement to every subcontractor from whose pay you are required to make a deduction. You have to do this within 14 days of the end of each tax month. A tax month runs from the sixth day of one month to the fifth day of the next month. You can give a subcontractor a statement each tax month or, if you pay them more often, one for each payment. Always give it to the subcontractor even if you pay an authorised third party.
If you and the subcontractor agree, you can issue statements electronically, as long as the subcontractor can store and print them. Each statement must include:
If a subcontractor needs a replacement statement for some reason you can give them one, but you must clearly mark it 'Duplicate'.
To help you prepare your subcontractors’ payment and deduction statements, as described in Appendix E of the booklet CIS340 - Construction Industry Scheme, the following form is now available for you to download, complete and give to your subcontractors. If you need to verify your subcontractors’ payment status please refer to the ‘Verifying’ and ‘Paying subcontractors’ sections above.
Payment & Deduction Statement (PDF 27K)
You don't have to give statements to subcontractors whom you pay gross, but it's good practice to do so. You could include some of the information that you put on statements of deduction.
As a contractor you'll have to make a CIS return to HMRC every month, even if you've made no payments. The return gives details of every payment you made to subcontractors under CIS during the last tax month. You can make your monthly return:
If you're making a 'nil return' because you haven't made any CIS payments to subcontractors during the last month you can also do it by phone to HMRC’s CIS Helpline.
If you know that you're not going to make any payments to subcontractors for a period of up to six months you can contact HMRC’s CIS Helpline and ask for the scheme to become 'inactive' for that period. HMRC won't send you any returns for that period. You must keep a note of the date the period of inactivity ends as you will need to submit returns after that period. HMRC will not send you a reminder. You will however receive a blank return to complete.
You can also request a period of inactivity by checking the box on the back of your most recent paper return or you can also notify HMRC online if that's how you file your returns.
You need to be aware that a period of inactivity is where you are paying no subcontractors at all. It is not a declaration that you will only be paying subcontractors from whom no deduction is required to be made.
You cannot declare a period of inactivity retrospectively to cover past periods for which you have failed to submit returns. Before you can request a period of inactivity you will need to ensure your returns are up to date.
If you pay a subcontractor during the time you told HMRC you would be 'inactive' you must phone the CIS Helpline immediately to ask for a blank return if you already don't have one.
Once HMRC receives a return from you during a period of inactivity, the period of inactivity will come to an end unless you subsequently ask for a further period.
You must also tell HMRC if you won't be making any PAYE (Pay As You Earn) payments for that period too. To do this you can use the online form 'No PAYE/NICs Payment Due'.
For general PAYE enquiries you can contact the PAYE Helpline.
Making your monthly contractor returns under CIS
Make your monthly return through the HMRC website
Read HMRC guidance on employment status
Find out how HMRC reviews subcontractors' gross payment status
