How to establish if you are a subcontractor and what this status means for you.
The Construction Industry Scheme (CIS) is a set of special rules for handling payments for construction work that contractors make to subcontractors.
If your business is involved with construction work then it might operate as a contractor or as a subcontractor - or as both. The terms 'contractor' and 'subcontractor' have specific definitions under the CIS scheme.
This article should help you to establish whether you are a 'subcontractor' within the CIS scheme and what this status entails for you. Please note, the article focuses on subcontractors based in the UK and operating as a sole trade or partnership.
What is a subcontractor?
Under the rules of CIS, you're a subcontractor if you agree to do construction work for a contractor. It doesn't matter how you actually carry out the work - you could do it yourself, get your employees to do it, use your own subcontractors or make some other arrangement.
Subcontractors can be self-employed individuals, other types of business, or other bodies and organisations. Some examples of subcontractors include:
- sole traders, partnerships and companies that do construction work for contractors
- labour agencies and staff bureaux that use their own workers to do construction work for a contractor - or that supply workers to a contractor, i.e. they’re not just 'introducers'
- gang leaders who contract to do work for a contractor
- local authorities and public bodies that do construction work for someone else
Careful - could you be an employee?
When you're working for someone else, it's important to know whether you're working as a self-employed subcontractor or as an employee. Your employment status is a point of law and will depend on the terms of each engagement you undertake - it isn’t up to the contractor or you to decide!
It is the contractor’s responsibility to assess an individual's employment status when they take them on. HMRC's website has guidance to help people decide their employment status, including an employment status indicator tool.
Registering as a Subcontractor
If you do think you meet the definition of a subcontractor, you must register as a subcontractor by calling the CIS helpline. You’ll need your:
- Unique taxpayer reference number (UTR)
- National Insurance Number
If you don’t have a UTR, you will need to register for Self Assessment in order to obtain one- before you are able to register as a subcontractor.
As a result of registering for Self Assessment, moving forward you will need to complete a tax return and keep good records- just like any other business has to.
What happens to your receipts
As a subcontractor, your contractor will make deductions from the payments they make to you. But these count towards your tax and National Insurance payments when you fill in your Self Assessment tax return.
A deduction is generally made against the labour element of your invoices; it won’t be made from other amounts you charge such as:
- Consumable stores
- Plant hire
- Manufacturing or prefabricating materials
The norm: 20% deductions
When HMRC register you as a subcontractor they will automatically set you up to receive payments 'under deduction'. This means contractors must make a deduction at 20% from the value of your invoices and pay it over to HMRC.
‘Gross payment status’
It is possible to apply for ‘gross payment status’ where you receive your payments from contractors without any deductions. But before HMRC can grant you gross payment status, you'll need to show them that your business passes certain tests. So HMRC do not make it easy to obtain gross payment status and it’s difficult to retain too.
Ouch - 30% deductions!
If you don't register with HMRC as a subcontractor, contractors should deduct 30% from your invoices. Although these will eventually be offset against your tax bill, that is a large chunk of your earnings and could have a serious impact on your cashflow.
We can help
If you are a subcontractor, your local TaxAssist Accountant can help you with your CIS and Self Assessment registration. They could also explore the possibility of obtaining gross payment status for you and help you pass those tricky business tests set by HMRC.
Needless to say, when it comes to all of the other normal responsibilities of being self employed, your local TaxAssist Accountant is well-versed on helping you keep your books and the completion of your tax return. We actively encourage our subcontractors to get their returns done nice-and-early, just in case there’s a tax refund waiting for them.
Your local TaxAssist Accountant will give you peace of mind that your affairs will be handled accurately and in a timely fashion, which leaves you to concentrate on your business. Contact us today to find out more about what we can do for you.
By Jo Nockels
Last updated November 2014
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.