If you’re a contractor in the construction industry, you need to be aware of your obligations under the Government’s Construction Industry Scheme (CIS). Essentially, this is a scheme similar to PAYE that requires contractors to withhold 20 or 30 percent of any payment due to a subcontractor and pay the deduction to HMRC.
A key element of the scheme is the process for verifying that a subcontractor is genuinely self-employed and should not be treated as an employee of your business for tax purposes.
In this article, we explain the process for verifying a subcontractor’s tax status together with a brief recap of the scheme, which is covered in more detail here.
You must register as a contractor with the CIS if:
you pay subcontractors to do construction work.
your business does not do construction work but you usually spend more than £1 million a year on construction.
CIS covers the following types of work:
Demolition or dismantling
Installation of heating, lighting, power, water and ventilation
You must register for CIS before you take on your first subcontractor. You must also check if you should be treating the sub-contractor as an employee. HMRC has guidelines on status.
Before making any payments to sub-contractors, check with HMRC that they are registered with CIS. Registration changes the percentage of the payment you deduct. Under CIS, you must deduct money from payments due to a sub-contractor and pass it to HMRC. The deductions of either 20 or 30 percent count as advance payments towards the subcontractor’s tax and National Insurance contributions.
You can use the CIS online service to make monthly returns or check if a subcontractor is registered.
Verifying is the process of checking if your subcontractor has registered under CIS and what their payment status is.
You also need to ensure that the contract between your business and the subcontractor confirms that the subcontractor really is self-employed. However, if the contract is a contract of employment, then you must treat them as employees for tax purposes and apply PAYE rather than register them for CIS.
It is a requirement under HMRC rules that a new subcontractor must be verified before they start working for you. However, you may already have subcontractors working for you.
You must therefore 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.
There are three ways to verify a subcontractor:
use HMRC's CIS online service
call HMRC's CIS Helpline - 0300 200 3210
use a third-party software package
Of course, your accountant will also be happy to do this on your behalf. If you’d like us to help with the process, give us a call on 0207 043 4000.
You (or your accountant) must provide the following information about your business as a contractor:
the name of your business or organisation
your unique taxpayer reference (UTR)
your accounts office reference
your employer reference
You will also have to provide the following information about the subcontractor, depending on whether they are a sole trader, partnership or company.
their unique taxpayer reference
their National Insurance number
name of the partnership
the partner’s name
the partnership’s unique taxpayer reference or registration number
the individual partner’s unique taxpayer reference or National Insurance number
name of the company
the company’s unique taxpayer reference
the company registration number
You will 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 the details provided against their own records and will confirm whether the subcontractor is registered. They will give you a verification reference number and tell you how much tax to deduct when you pay them.
The verification number is generally in the format of V followed by 10 numbers, such as V123456789. If HMRC can't verify that the subcontractor is registered they will provide a different type of reference number. If you verify multiple subcontractors at the same time, HMRC will provide the same verification number.
The verification number acts as your proof that you are deducting the correct amount of tax.
Based on HMRC’s response, the rate of tax you need to deduct will be:
30% if they are not registered as subcontractors
20% if they are registered at the standard/ net rate
0% if they are registered with gross payment status
If you have used a subcontractor in the last two years, you won’t have to verify them again. However, the HMRC CIS website will warn you if the verification is out of date. You will then need to complete and submit a new CIS subcontractor verification, checking that none of the subcontractor’s information has changed.
Keeping verification up to date is essential because the subcontractor’s rate of tax deduction may change. HMRC only notify contractors and subcontractors if verification is up to date. If your verification is up to date, you can continue to pay and deduct tax at the rate advised by HMRC when they provided the current verification number.
When the verification process is complete, you’ll need to file monthly returns and keep full CIS records.
You can submit monthly returns through the CIS online service and you can also use the site to check your list of subcontractors, view previously submitted returns and update any details that you need to change.
This is a brief outline of the steps you have to take to verify subcontractors and comply with CIS.
If you would like to discuss any aspect of the scheme or need help with the verification process and tax deductions, our team of experienced small business accountants are well versed on CIS and will be glad to help. To find out more, please contact us on 0207 043 4000 or email@example.com.