Summary of Key Points
- Register as a Contractor before hiring a sub-contractor.
- Verify each sub-contractor.
- Assess whether each sub-contractor is self-employed or employed under the HMRC rules.
- Issue detailed statements to each sub-contractor by the 19th of every month following the month worked.
- Pay over all deductions to HMRC by the 22nd.
- Complete the monthly statement and submit this to HMRC by 19th.
The construction industry historically has a higher proportion of self-employed people (34%) than UK industry as a whole (11% average). As a result the “tax take” has been less than other comparable industries, with much lower PAYE and NI revenues. The aim of the Construction Industry Scheme (CIS) was therefore to increase the tax take by making it mandatory for more people working in this industry to be paid “net” and not at the gross value of their invoices.
There is a separate web page “How can I save tax in the construction industry?” which deals with the main issues for sub-contractors. But the obligations on Contractors are more onerous and the potential penalties are greater. One thing to bear in mind – the HMRC does not, in the opinion of most agents who work in this field, understand this industry and how it works. So don’t expect “common sense” approaches to work, very often what seems like common sense to someone in the industry seems like a breach of the rules to someone in the tax office!
Registering as a Contractor
Before taking on a sub-contractor, you must register with HMRC. Call 0845 607 0143 in order to do this, or go to this site:
Whether you intend to pay the sub-contractor net or gross of tax, register before the contract begins if at all possible.
Verifying your Sub-contractors
The next task is to get all your sub-contractor’s details as follows:
- Unique Taxpayer Reference (UTR) – 10 digit code.
- National Insurance number.
The contractor will also need to know his/her UTR, Accounts Office reference from yellow P30, and PAYE employer code. Armed with this, the contractor can either call 0845 366 7899 or go to the above website and enter the required details. HMRC will then provide a verification code and advise the contractor what deduction rate to apply:
- 0% for a sub-contractor who is deemed self-employed.
- 20% for one who is deemed an employee under the HMRC rules but has an existing HMRC record.
- 30% for a sub-contractor who does not have an existing HMRC record.
Note that the 30% rate will also apply if some of the sub-contractor details have been keyed in wrongly, or if they have been keyed in correctly but the HMRC records have incorrect information. These problems need sorted out or the sub-contractor is going to be paid short.
Assessing Employment Status
The contractor has a legal obligation to assess the employment status of each person being verified. This is an ambitious task, since 200 years of case law right up to the House of Lords still leaves the UK in a position where the exact employment status of millions of people is a “grey area”!
However, if the contractor goes to the following web page: http://www.hmrc.gov.uk/calcs/esi.htm and follows the instructions there for each person, then he or she can be confident they have discharged their obligation. But it’s important to realise that this is very much a “quick and dirty” assessment and it’s possible that either the worker or HMRC could challenge this at a later date – so it’s a good idea to keep a printed record of each assessment. If there is a change in the way a sub-contract is operating, return to the web page above and carry out another status test.
The Contractor must pay each sub-contractor at the correct rate. Failing that, the Contractor is liable for any shortfall between the deductions which should have been made and those which were made. Either with each payment made net, or once a month, the Contractor must provide a statement to the sub-contractor showing:
- Contractor’s name.
- Contractor’s employer reference.
- Details of gross and net payments made.
- Cost of materials – from which there is zero deduction.
- Amount of the deduction made.
For anyone being paid at the 30% deduction level, the “unmatched” verification number should also be included on the statement. The statements must be issued by the 19th of the month following the month concerned. Payment of the deductions to HMRC is also due by the 19th, or the 22nd if the payment is made electronically.
Returns to HMRC
The Contractor also has an obligation to supply and verify information with HMRC. By the 19th of each month, he/she must supply in a monthly return:
- Payments made by sub-contractor.
- Deductions made in each case.
- Declaration that the employment status has been considered.
- Declaration that the verification process has been correctly applied.
Note that the third item above implies that if there have been changes to the way the sub-contract is operating during the month, the Contractor should have re-assessed the employment status. There is an automatic £100 penalty for each late return.