HMRC has a set of rules that govern the way in which contractors make payments to subcontractors, called the Construction Industry Scheme. All construction work carried out in the UK is covered by the scheme, and it is necessary to know whether you are classed as a subcontractor or a contractor under the rules.
What is a subcontractor
The Construction Industry Scheme has a specific definition of a subcontractor, even though you may not think that you are one. If you are working for a contractor doing construction work, you will be known as a subcontractor for CIS purposes. A subcontractor could be a sole trader, a partnership or a company. Contractors sometimes hire gang leaders to do work for them, and even though they then in turn hire others to do the work, they are classed as subcontractors. In fact, any person, company or organisation that carries out work for a contractor in the construction industry will be defined as a subcontractor.
It is important to know whether you are employed or working as a subcontractor, so that you pay the right amount of tax and national insurance.
When CIS is not applicable
Not all contracts carried out in the construction industry fall within CIS. HMRC may provide exemption from the scheme in certain scenarios – like when a contractor pays a subcontractor to carry out work on property belonging to either of them, but pays them below £1,000, not including the cost of materials. Construction work paid for by a trust or a charitable organisation is another example of work that doesn’t fall within CIS.
Although a private homeowner may hire someone to carry out construction work on their property, they will not be classed as a contractor.
Being paid as a subcontractor
Subcontractors have responsibilities which they must fulfil in order to be paid correctly. Initially, if you agree to a contract that falls under CIS, you should register for the scheme as soon as possible; this is so that the contractor will be able to verify you with HMRC. Not registering will result in HMRC not being able to verify you and a higher rate of deductions being made from your pay. If you are paid gross that is without any deductions, you will have to declare the income on your self assessment tax return. If the contractor has to make deductions, they will be at the rate of 20 per cent if you have been verified and 30 per cent if HMRC is unable to verify you.
CIS is complex legislation and you may need to seek advice.
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