Who is considered a contractor or subcontractor
Under the terms of the CIS, a contractor is defined as “a business or other concern that pays subcontractors for construction work”. This can include many people and organisations, typically construction companies and building firms, but it could also include government departments and local authorities. Private households would not be considered contractors under this system and therefore do not have to adhere to these guidelines.
A subcontractor is “a business that carries out construction work for a contractor”. Your work may involve you sometimes acting as both or either party; in that case, you must adhere to the guidelines for both contractors and subcontractors.
Contractors need to know whether they have an “employee” or are using a subcontractor. A subcontractor is clearly stated to be a business working for a contractor, not a paid employee on the contractor’s staff. Therefore, if you are paying someone for construction work but are not considered their own business, they should not be considered a subcontractor.
Where should you get started?
With those key definitions out of the way, what is your responsibility as a contractor or subcontractor in adhering to the scheme? Well, the first thing you need to do is register.
Registering as an Employer
You should register as a employer when ready to pay your first contractor or subcontractor. You can start registering as a new employer here. After registering, the HMRC will set up your Contractor Scheme and instruct you where to find further information.
Registering as a Subcontractor
You should register as a subcontractor when ready to start working in the construction industry. Regarding subcontractors, there are different forms depending on whether you are a sole trader or another type of business. You should check out the government site for more information on these forms. When you have completed registration, the HMRC will contact you to confirm your registration and give you information about moving forward.
When registering as a subcontractor, you should also consider whether you want deductions to be made by your contractor or if you want to receive a gross payment. If you receive a gross income, then you will still be responsible for making the deductions for the appropriate taxes at a later date.
What are contractors responsible for
As a contractor under the CIS, you have a few responsibilities:
- Verifying your subcontractors
- Making deductions from payments
- Sending returns to HMRC
- Making payments to HMRC
Verifying subcontractors is one of the most critical responsibilities of a contractor. Before paying a subcontractor for their construction work, you must verify with HMRC that the subcontractor is registered with them. The HMRC will then further assist by letting you know what their deduction rate should be or whether the subcontractor has requested gross payments.
Verifying your subcontractors can happen in 1 of 2 ways; you can use the HMRC CIS Online Service or a commercial CIS software such as Moonworkers. You might be wondering what the benefits of commercial CIS software are; after all, the HMRC offers its own for public use. After we cover the subsequent few responsibilities of contractors under the CIS, we will discuss in more detail why commercial CIS software can benefit contractors.
Making Deductions from Payments
The CIS dictates that payments from contractors to subcontractors must account for the subcontractors’ tax status. This is why some contractors may need to make deductions from payments to subcontractors (this is, of course, not the case if the subcontractor requests gross revenues). The deductions that contractors make are then paid to the HMRC. (Side Note: The cost of materials incurred by the subcontractor should not be included in the part of the payment that deductions are made.)
If you are a contractor responsible for making a deduction, here is what you must consider when making payments:
- Calculate the deduction
- Make the deduction
- Record details of the payment, materials, and deduction
- Make the net payment to the subcontractor
- Complete and give the appropriate statement of deduction to the subcontractor
These deductions must be considered and calculated carefully. However, in the instance of an error, you can reach out to the HMRC to attempt to make corrections.
Every month, contractors will need to send the HMRC a return of all the payments they made within the CIS or inform them if they have not made any payments during this time. The HRMC needs to have these returns within 14 days of the end of the month they correspond to.
Your returns should include:
- Details of the subcontractors
- Details of the payments made and any deductions withheld
- A declaration that the employment status of all subcontractors has been considered
- A statement that all subcontractors that need to be verified have been verified
Much like the verifications, returns can be made in 1 of 2 ways: Using the HMRC CIS online service or commercial CIS software.
Payments to HMRC
After verifications, deductions, and returns, contractors will be responsible for sending payments to the HMRC from deductions that they made from their subcontractors. Contractors may face penalties if these payments are not made on time and in full.
Why Use a Commercial CIS Software?
We have summarised the responsibilities of a contractor through the CIS into these four main categories:
- Verifying subcontractors
- Making deductions from payments
- Send returns to the HMRC
- Making payments to the HMRC
While the HMRC offers an online portal to get these things done, most of the responsibility for making calculations and completing assessments will still be in the hands of the contractors.
For example, you’ll need to manually input subcontractor information such as name UTR (Unique Taxpayer Reference), National Insurance number, and more details depending on their business or another concern status.
Then, when making deductions, you’ll need to complete the following calculations:
- Step 1 – Calculate the gross amount from which the deduction will be made by excluding VAT charged by the subcontractor (depending on if the subcontractor is registered for the VAT). You’ll need to record this gross amount so that you can also enter it on your monthly returns.
- Step 2 – From the gross payment amount, you’ll also need to deduct the amount the subcontractor paid for the following: materials, consumable stores, fuel (except for travelling), plant hire, and the cost of manufacture or prefabrication of materials.
After calculating deductions, the contractor will still be responsible for sending returns to the HMRC each month. Using the HMRC CIS online service, you can input all of the records you kept for gross amounts paid, deductions, etc.
Then, with all these things taken care of, you’ll need to make sure that you get your payments for any deductions to the HMRC monthly or quarterly. These responsibilities can quickly add up, and on top of all the other logistics of running a business, they can feel overwhelming for some contractors. However, you can significantly reduce the stress associated with most of these tasks when assisted by CIS commercial software.
Moonworkers has recently become CIS compliant; here’s how we can help
Turning to commercial CIS software is their best bet for contractors looking to make handling their subcontractors and CIS responsibilities as simple as possible. And while some commercial CIS software may solely help with CIS duties, others strive to do more for the business owner, like our service here at Moonworkers.
Moonworkers was established to help business owners and HR departments streamline their payments, onboarding, and many more parts of their business operations. While this means automating workflows and payment calculations under other government regulations, we look to contribute to as many industries as possible. The CIS is an essential part of your work life for construction workers, so we have become CIS compliant to help contractors with their duties.
With Moonworkers CIS compliance, we support our platform's CIS 300 submissions and subcontractor verifications. When you are ready to start hiring subcontractors, you can have everything in place in one platform to ensure that you adhere to guidelines without stressing over tedious tasks. With these essential duties out of the way, you can spend more time on other areas of your business and worry less about the particulars. You can ensure that at the end of every month and every quarter, your CIS submissions are on time with the correct calculations.
If you want to discuss more regarding our service, and if we can serve your needs, feel free to book a demo, chat with our product experts, and even try out the Moonworkers platform.