Overview:
Your business must register with HMRC as a contractor if you are:
- paying subcontractors to do construction work for you, or –
- not in a construction business but still usually spend more than £1m a year on construction related work.
Make deductions and pay to you subcontractors:
In order to comply with CIS regulations as a contractor, you must deduct some percentage before making payment to your subcontractors. Your subcontractors can be an individual, another limited company or partnership.
HM Revenue and Customs (HMRC) will tell you how much to deduct from a subcontractor’s payments when you verify them. Verification can be done through commercial software or HMRC CIS online service.
The rates for CIS deductions are:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% if the subcontractor has ‘gross payment’ status – something eligible subcontractors have to specifically apply for.
These deductions must be paid to HMRC, the same way as PAYE – these are accounted for as an advance payment towards the tax and National Insurance bill of the subcontractors.
Expenses to Consider before making CIS deduction:
In order to make CIS deductions for subcontractors payments, start with the total (gross) amount of the subcontractor’s invoice and then deduct the following expenses;
- Amount of VAT charged if the subcontractor is VAT registered
- Cost of materials bought
- Cost of equipment which are now unusable
- Fuel Cost except the ones for travelling
- Other direct costs such as equipment hired for this job (Plant Hire)
- Any manufacturing related cost or prefabricating materials
The balance left over will be the cost of Labour for doing the construction work, so we need to apply the relevant CIS rate on that amount. Keep that CIS deduction for payment to be made to HMRC and paid the rest to the subcontractor (for all the materials, direct costs and cost of Labour after CIS deduction).
Payment to HMRC for the CIS deducted:
You as a contractor have an obligation to run the CIS payroll no matter if you have any PAYE employees or not.
Your company must submit a monthly report (RTI) to HMRC providing certain information, including the amount of CIS deducted from the subcontractors. The report needs to be made for all individuals and businesses you employ as CIS subcontractors as part of your working arrangements.
You must pay all the CIS deductions made, to HMRC in the same way as other PAYE payments.
