Verifying and paying subcontractors

Construction industry contractors must follow the right steps when paying subcontractors. 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 steps.

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Verifying subcontractors

You may need to 'verify' a subcontractor with HM Revenue & Customs (HMRC) before you give them their first payment. Verifying is the process of checking if your subcontractor has registered under CIS and what their payment 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 in PAYE not CIS. Being registered as a CIS subcontractor does not show that person is self-employed.

Find out more about whether your subcontractor is classed as employed or self-employed

When do you need to verify a subcontractor?

Normally 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.

How to verify a subcontractor

To verify a subcontractor you can:

  • use HMRC's CIS online service
  • call HMRC's CIS Helpline
  • use Electronic Data Interchange (EDI) or other third party software

Use HMRC's online services to verify subcontractors

Whichever way you choose, you'll need the following details about yourself:

  • the name of your business or organisation
  • your unique taxpayer reference (UTR)
  • your Accounts Office reference
  • your employer reference

You'll also need the following information about the subcontractor:

  • their name, or the name of their business or company
  • their UTR
  • the partner's name if they're a partnership
  • their National Insurance number (if you know it) if they're a sole trader (unless they have applied for a National Insurance number, but not been allocated one yet)
  • the partner's UTR or National Insurance number if they're a partnership (or, if the partner's a company, that company's UTR or company registration number)
  • their company registration number if they're a company

You'll also need 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 the subcontractor's registered with them. It's important you keep a note of it.

CIS Helpline

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Paying subcontractors

When HMRC verify a subcontractor, they'll tell you how to pay them. This could be:

  • gross - meaning you don't make any deductions
  • by making deductions at the standard rate (20 per cent)
  • by making deductions at the higher rate (30 per cent), because the subcontractor isn't registered or couldn't be verified for some other reason

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.

Making deductions

To make a deduction from a subcontractor's payment, start with the total - gross - amount of the subcontractor's invoice and then take away:

  • any VAT they've charged
  • the amount of any Construction Industry Training Board (CITB) levy they've paid

Then take away the amount the subcontractor actually paid for:

  • materials
  • consumable stores
  • fuel used - except for travelling
  • plant hire
  • manufacturing or prefabricating materials

Include VAT if they are not VAT registered.

Finally, apply either the standard or the higher rate percentage to the amount left - this gives you how much to deduct.

Making payments to subcontractors

Once you know how much to pay the subcontractor you'll probably pay it direct to them. But they could authorise you to pay a third party like a debt factor.

Keep a record of every payment you make to each subcontractor. Include details of:

  • the gross invoice amount excluding VAT
  • if you made a deduction, the actual cost of any materials (excluding VAT if the subcontractor is VAT registered)
  • any deduction you made

Subcontractor tells you that their payment status has changed

Occasionally a subcontractor may show you a letter from HMRC telling them that their payment status is changing from 'payment under deduction' to 'gross payment' before you have received your letter.

If this happens, or you have any other reason to query the subcontractor's payment status, verify the subcontractor again to get their up-to-date payment status.

To find out how to verify a subcontractor’s payment status go to the 'Verifying subcontractors' section of this guide.

Making payments to HMRC

You will need to pay the deductions that you take from a subcontractor's pay 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

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Giving payment and deduction statements

You must give a written statement to every subcontractor you make a deduction from. 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 give them electronic statements, as long as the subcontractor can store and print them. Each statement must include:

  • the name of your business and your employer tax reference
  • either the date when the tax month in which you made the payment ended, or the date when you made the payment
  • the subcontractor's name and UTR
  • the subcontractor's verification reference number if the deduction was at the higher rate
  • the gross amount before you made the deduction but after you'd taken off any VAT, CITB levy, materials costs and so on
  • the cost of any materials you took off before making the deduction
  • the amount you deducted

If a subcontractor needs a replacement statement you can give them one, but you must mark it 'Duplicate'.

To help you prepare your subcontractors' payment and deduction statement you can download a typical statement below. There is more information on this in Appendix E of the booklet CIS340 - Construction Industry Scheme.

If you need to verify your subcontractors' payment status please refer to the 'Verifying' and 'Paying subcontractors' sections above.

Payment & Deduction Statement (PDF 27K)

Obtain the booklet 'CIS340 Construction Industry Scheme - guide for contractors and subcontractors' (PDF 268K)

Issuing gross payment statements

You don't have to give statements to subcontractors if you pay them gross. It's good practice to do so.

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Making monthly returns

As a contractor you 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 return:

  • through HMRC's CIS online service
  • electronically using EDI
  • by post

If you're making a 'nil return' because you haven't made any CIS payments to subcontractors during the last month you can do that by calling HMRC’s CIS Helpline.

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Requesting periods of 'inactivity'

If you know you're not going to make any payments to subcontractors for up to six months you can ask for your scheme to become 'inactive'. HMRC won't send you any returns for that period. Keep a record of the date the inactivity ends, as you will need to send returns after that period. HMRC will not send you a reminder. But they will send you a blank return if you normally send in paper returns.

Ask for your scheme to become inactive by:

  • using HMRC's Online Service to ask for a period of inactivity, if you file your returns online
  • checking the box on the back of your most recent paper return, if you file paper returns

Or you can call the CIS Helpline.

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 you don't need to make deductions from.

You should only request a period of inactivity if your returns are up to date. You can only declare a period of inactivity before your return is due, not for past months.

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.

You must also tell HMRC if you won't be making any PAYE (Pay As You Earn) payments for that period. To do this you can use the online form 'No PAYE/NICs Payment Due'.

For general PAYE enquiries you can contact the PAYE Helpline.

CIS Helpline

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

Obtain the booklet 'CIS340 Construction Industry Scheme - guide for contractors and subcontractors' (PDF 268K)

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