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What a contractor deducts from a construction invoice and pays over to HMRC, and what the subcontractor actually receives. Materials, plant hire and VAT come out of the sum first, exactly as CIS340 requires.
Verify a subcontractor with HMRC before the first payment. One is still needed if they have not been on a CIS return in the current or last 2 tax years.
Before VAT. This is the only part of the invoice the deduction is taken from.
Only what they bought themselves. Materials you supplied were never on their invoice, so they change nothing.
Since 1 March 2021 the reverse charge is the default for CIS work between VAT-registered businesses.
CIS deduction
£0
Three rates and one sum. 20% for a subcontractor registered with HMRC and matched on verification, 30% where they were never verified or HMRC could not match them, and nothing at all under gross payment status. Whichever applies, it comes off the labour only.
CIS, run properly through payroll
Moonworkers verifies subcontractors with HMRC, splits labour from materials on every payment, files the monthly CIS return and issues the payment and deduction statements.
The rate is the easy part. Nearly every CIS error is an error about the sum the rate is applied to.
Step 1
HMRC tells you which of the three applies: pay gross, deduct at 20%, or deduct at 30% because they could not identify the subcontractor. Verification lasts the current tax year and the two before it.
Step 2
Out comes the VAT, then the materials, consumable stores, plant hire, fuel used on site and prefabrication, provided the subcontractor paid for them. What remains is the sum.
Step 3
Apply the rate, pay the subcontractor the rest, and send the deduction to HMRC by the 22nd of the following month. Give the subcontractor a payment and deduction statement, and file the monthly return.
A subcontractor on the payroll rather than on an invoice is a different question entirely. See the take-home pay calculator for PAYE and National Insurance.
Take the invoice, remove the VAT, then remove everything the subcontractor bought or hired for the job: materials, consumable stores, fuel used on site, plant hire, and manufacturing or prefabrication. Apply the rate to what is left, which is the labour. That figure is deducted from the payment and sent to HMRC.
It is 20% for a subcontractor who is registered with HMRC under the scheme and whose details HMRC matched when the contractor verified them. It is 30% where the contractor never verified, or verified but HMRC could not identify the subcontractor. The two cases look different on the verification reference: a matched subcontractor gets a number like V0004528765, an unmatched one gets the same number with a letter added, V0004528765/A.
Some subcontractors pass HMRC business, turnover and compliance tests and are paid without any deduction at all. The contractor still has to verify them, still reports the payment on the monthly return, and simply deducts nothing.
No. A subcontractor who has appeared on one of your CIS returns in the current tax year or either of the previous two does not need verifying again. Anyone else does, before the first payment.
Only those the subcontractor paid for directly. Materials you supplied were never on their invoice and change nothing. HMRC also lets you take out consumable stores, plant hire, fuel used doing the work, and prefabrication. Fuel for travelling stays in the sum.
Challenge it before you pay. You can ask for evidence of the direct cost, and you are expected to keep records showing the materials element is not overstated. If it turns out to be inflated, HMRC recovers the under-deduction from the contractor, not from the subcontractor.
It changes who pays the VAT, not the deduction. Since 1 March 2021 most CIS work between VAT-registered businesses falls under the domestic reverse charge: the invoice shows no VAT to pay and the contractor accounts for it instead. Either way VAT is outside the CIS sum. The reverse charge does not apply to a customer who is not VAT registered, to zero-rated work, or where the customer has confirmed in writing that they are an end user or an intermediary supplier.
They cannot charge VAT, and the reverse charge does not reach them. The VAT they paid on their own materials is money they cannot reclaim, so it forms part of their direct cost and comes out of the sum along with the materials themselves.
By the 22nd of the month following the end of the tax month if you pay electronically, or the 19th if you do not. Tax months run from the 6th to the 5th. The monthly CIS return covering the same period is due by the 19th.
No, it is a payment on account. It is set against the subcontractor’s eventual income tax and National Insurance, or for a limited company against its PAYE liabilities. A subcontractor who over-pays through deductions claims the difference back.
Paying subcontractors every month, and filing the CIS return by hand?
Try Moonworkers Payroll