Getting paid and paying tax - advice for subcontractors

The Construction Industry Scheme (CIS) sets out the rules for contractors when they pay subcontractors for construction work. This guide explains what you need to do if you're a subcontractor to make sure you get paid correctly when you work for a contractor. It also explains how the contractor will work out your pay.

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The first steps to getting paid under CIS

Under CIS, contractors may have to 'verify' the subcontractors who work for them. This means checking your payment status with HM Revenue & Customs (HMRC) so they can pay you the right amount.

When you get a contract to do work covered by CIS, you'll need to register with the scheme as soon as possible, if you're not already registered. The information HMRC will need to register you depends on whether you're a sole trader, a partnership, or a company but generally, it will include your name, your business name, your business address and other details about your business.

You can also ask HMRC to record one trading name.

You'll need to give similar details to the contractor as well. When the contractor contacts HMRC to verify you, HMRC will match up the information you've given the contractor with the details you gave HMRC.

If you don't register - or if HMRC can't verify you because you haven't given the contractor the correct details about yourself - you could end up with a deduction from your payments made at the higher rate.

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Payments under CIS - gross or under deduction

Under CIS, there are two ways of paying subcontractors - gross or under deduction.

If you are registered for gross payment, the contractor pays you in full without any deduction. So you'll need to pay tax and National Insurance contributions (NICs) on this amount later through your tax return.

If you are registered for payment under deduction, the contractor takes off an amount (currently 20 per cent) before they pay you and they must pay this over to HMRC. You'll still need to pay tax and NICs on your payments later through your tax return, but HMRC will set any deductions that have already been made from your payments against this bill.

Find out about completing your Self Assessment tax return

Find out about paying Corporation Tax if you operate as a company

Who can receive gross payments under CIS?

If you run a business that meets certain conditions, you can ask HMRC to register you for gross payment. Your business must:

  • do construction work in the UK and be run largely through a bank account
  • have a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and most companies)
  • have complied with all its tax obligations

Before HMRC can grant you gross payment status so you can get paid with no deductions, you'll need to show them that your business passes three tests.

Business test

You'll need to show HMRC that your business:

  • carries out construction work - or provides labour for construction work - in the UK
  • is run largely through a bank account

Turnover test

HMRC will look at your business turnover from construction work for the 12 months before you apply for gross payment status. Ignoring VAT and the cost of materials, your construction turnover must be at least:

  • £30,000 if you're a sole-trader
  • £30,000 for each partner in a partnership, or at least £200,000 for the whole partnership
  • £30,000 for each director of a company, or at least £200,000 for the whole company

If five people or fewer control your company, it must have an annual construction turnover of at least £30,000 for each of these individuals.

Compliance test

You and any directors or partners in the business, or beneficial shareholders (where the company is controlled by five or fewer persons) must have submitted all tax returns and paid all tax due on time in the 12 months before your application. If HMRC has asked for any information about your tax affairs in that period, you'll need to have given it to them.

You're allowed a few lapses or late payments in the 12 months and HMRC will ignore any, or all, of the following failures:

  • three late submissions of the CIS contractor monthly return, including 'nil' returns - up to 28 days late
  • three late payments of CIS/PAYE deductions - up to 14 days late
  • one late payment of Self Assessment tax - up to 28 days late
  • any employer's end of year return made late
  • any late payment of Corporation Tax - up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty
  • any Self Assessment return made late
  • any payment not made by the due date, where it is less than £100

If HMRC agree that you can be paid gross, you must declare your payments in your tax return at the end of the tax year.

If you are paid gross you may be subject to something called a Tax Treatment Qualification Test (TTQT) also known as a Scheduled Review. HMRC may check that you still qualify for gross tax payment.

Find out about the TTQT

Find out about subcontractor registration and obligations under CIS

Find out about completing your Self Assessment tax return

Receiving CIS payments under deduction

If you don't qualify for gross payments, your contractor will make a deduction on account of your tax and NICs before they pay you. The standard deduction rate of 20 per cent applies if you've registered for CIS and the contractor's verified your details successfully.

If you haven't registered for CIS or the contractor couldn't verify you, they'll have to make deductions at the higher rate of 30 per cent. You can claim credit for these deductions through your annual tax return.

Subsistence and travelling expenses count as pay, so they'll be liable for deductions too. But VAT, the cost of materials and certain other costs like plant hire don't count as pay, so the contractor will exclude them when they work out how much to deduct.

You'll need to complete a Self Assessment tax return at the end of the year. HMRC will work out your tax and NICs bill and set any deductions you've had made against it. This will show whether you're due a refund or you need to make further payments. If you're paid under deduction, make sure your contractor gives you monthly statements of payments and deductions. You could ask them for these if you get paid gross, too. Keep these statements to help you fill in your tax return.

Read about the basics of Self Assessment

Read about Corporation Tax

Complete your Self Assessment tax return online

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Nominating someone else to receive payment

If you choose someone else to receive payments on your behalf - like a gang member, workmate, relative or debt factor - they should also register with HMRC. This person is called your 'nominee'. If you're registered to be paid gross, the contractor will pay your nominee gross as long as the nominee is registered for gross. But if they're not, they'll be paid under deduction - even if you're registered to be paid gross.

Payments under CIS if a subcontractor dies

If a subcontractor dies, their personal representatives will receive any outstanding payments due. If the subcontractor was registered to be paid gross, their personal representatives will be paid gross too. If a liquidator, receiver or administrator is dealing with the subcontractor's company affairs, any outstanding payments will be made according to the company's tax status.

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