The Construction Industry Scheme
CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.
Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.
It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.
If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.
The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.
Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.
For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.