Contractors and subcontractors in the construction industry must comply with special taxation arrangements. The Construction Industry Scheme (CIS) was extensively revised in April 2007.

If you are a contractor, you must check the tax status of all new subcontractors with HM Revenue & Customs (HMRC) before making any payments to them. This is known as the "verification" process. Once you have completed the verification process you must then pay subcontractors either gross or net of a deduction, as specified by HMRC.

You must also submit a monthly return. If you are a subcontractor, you need to register with HMRC, otherwise higher-rate deductions will be made from your payments from contractors. However, you may be able to receive gross payments if you can pass HMRC's business, turnover and compliance tests. This guide will show you what to do if you are a contractor or subcontractor - or if you act as both.

Types of business covered by the Construction Industry Scheme

It's a good idea to check if the work you are carrying out is covered by the Construction Industry Scheme (CIS). If any part of a contract is covered by the scheme, then any payments made by contractors and received by subcontractors in relation to the contract must be made through it.

There are detailed rules outlining what comes under the scheme, but in general terms, payments for the following operations must be made within the CIS:

• demolition and site clearance.
• tree felling.
• earth moving, tunnelling and excavation.
• preparing and laying foundations.
• construction of or alteration to any permanent or temporary building.
• construction of site facilities.
• installation of pipes, drains, sewers or underground cabling.
• construction, surfacing or repair of roads or driveways.
• any internal cleaning or fitting work on buildings, including heating, lighting, ventilation, air conditioning, power supply, drainage, water supply, kitchens or bathrooms.
• installation and repair of glazing, doors or shutters.
• any painting and decorating.
• finishing such as floor covering (but not carpeting) and locks.

There are many other activities covered by the scheme and some activities are also specifically excluded.

Download a detailed list of operations covered by the CIS from the HM Revenue & Customs (HMRC) website (PDF) - Opens in a new window.

If you have any doubt whether the CIS applies to the work you are doing, it's a good idea to check with the HMRC Construction Industry Scheme Helpline on Tel 0845 366 7899.

Download a quick guide to the CIS from the HMRC website (PDF) - Opens in a new window

Download a guide showing the scope of the CIS from the HMRC website (PDF) - Opens in a new window

Download a detailed guide to the CIS from the HMRC website (PDF) - Opens in a new window

Register as a contractor

If you pay other people or businesses to carry out construction work for you, you are a contractor and must register and apply for the Construction Industry Scheme (CIS) as a contractor.

You will also be a contractor under the scheme if you spend an average of £1 million or more per year for three years on construction activities, regardless of the type of business you are.

Even if you think you may be a subcontractor, or are a gang leader (that is, a subcontractor who deals direct with the original contractor but also acts as a contractor to a gang of construction workers), it's a good idea to check if you need to register as a contractor, as the definition of "contractor" is very specific and covers a variety of circumstances.

You must register with HM Revenue & Customs (HMRC) before you take on your first subcontractor.

How to register

Call the HMRC New Employer Helpline on Tel 0845 60 70 143.

http://www.hmrc.gov.uk/cis/cis-online.htm

HMRC will set up a contractor scheme for you and send you an information pack which provides detailed advice on managing the scheme. It will also set up a PAYE scheme if you need one.

If you were registered as a contractor under the previous version of the CIS (prior to April 2007), you do not need to re-register.

Once you have registered, you can start to make payments to contractors. The first step is verifying their tax status under the scheme.

Verification of subcontractors

Before you pay a subcontractor for the first time, you must ensure they are genuinely self-employed and are not being engaged on terms that make them an employee of your business. Download guidance on determining employment status from the HM Revenue & Customs (HMRC) website (PDF) - Opens in a new window.

If you are satisfied they are self-employed, you must then check if they are registered with HMRC and find out whether you need to make a deduction from their payments. You do this through the verification service.

There are three ways you can use the service to verify a subcontractor:

by phone - Tel 0845 3667 899

online - use the Construction Industry Scheme (CIS) online verification service on the HMRC website - Opens in a new window

electronically - via Electronic Data Interchange (EDI), or through approved third-party software

However, if you have paid a subcontractor under the previous version of the CIS since 6 April 2005, you may not need to verify them.

Information you need for verification

The information you must provide about the subcontractor will depend on their business type. In all cases, you will need their name and Unique Taxpayer Reference (UTR).

For sole traders and partners in a firm who are individual persons, you must also have the subcontractor's National Insurance number.

For partnership subcontractors, you will also need the name and UTR of the firm as well as the details of the individual partner.

For companies, you must also provide the subcontractor's company registration number.

What to do after verification

Once the verification has been carried out, HMRC will tell you how you must pay the subcontractor. The options are:

Gross (i.e. without any deductions being made from the payments).

Net of a deduction from the labour element of their pay at the standard rate, which is currently 20 per cent.

Net of a deduction from the labour element of their pay at a higher rate (where the subcontractor cannot be verified). The higher rate of deduction is currently 30 per cent.

Keeping verification references

When each verification session is completed, you will be issued with a verification reference for that session. However, if any of your subcontractors are not found by HMRC during the verification process and you are told to make a deduction from their payments for labour at the higher rate of 30 per cent, you will be given a unique verification reference for each subcontractor in that category. It's essential that you keep a record of all verification references - you must include these in your monthly returns against each subcontractor from whom you are instructed to make a deduction at the higher rate. Failure to do so could result in a penalty. See the page in this guide on submitting monthly returns - contractors.

Paying subcontractors

Once you have verified the subcontractor, you can calculate what payment should be made to them.

Calculating payments to subcontractors

Before you make the deductions from those subcontractors who cannot be paid gross, you must determine that part of the proposed payment that covers the cost of materials incurred by the subcontractor.

First, you must work out the gross amount to be paid, deducting any VAT charged if the contractor is VAT-registered and the required levy for the Construction Industry Training Board, if appropriate. Keep a note of the gross amount - you will need it for your monthly return.

Second, you must deduct the exact amounts the subcontractor paid for:

materials

consumable stores

fuel (except fuel used for travelling)

plant hire

the cost of manufacture or prefabrication of materials

You are entitled to ask the subcontractor to prove these amounts. If they cannot do so, you must make a reasonable estimate.

Once you have arrived at this second figure, you can calculate and make the deduction at the rate specified by HM Revenue & Customs (HMRC) when you verified the subcontractor (or, if verification was not necessary, at the rate you last paid the subcontractor).

Monthly statements to subcontractors

You must provide at least a monthly statement to all subcontractors from whom you have made a deduction if you have paid them in that tax month.

The statement must show all of the subcontractor's details (including their Unique Taxpayer Reference number), the gross amount as noted above, the cost of materials deducted during the calculation and the deductions made. Where deductions have been made at the higher rate you must also include the unique verification reference that HMRC will have given you when you attempted to verify that subcontractor.

Download further guidance on contractors' responsibilities, including statements for subcontractors, from the HMRC website (PDF) - Opens in a new window

The scheme for subcontractors

When you register for self-assessment - or the corporation tax equivalent if you are trading through a limited company - you will be provided with a Unique Taxpayer Reference (UTR) number. This number will be used by contractors to ascertain whether you are registered for the Construction Industry Scheme (CIS) and what deductions, if any, should be made from your payments. If you do not have a UTR and are not registered for the CIS, all payments for labour from contractors will have deductions made at the higher rate.

Download guidance on registering as a subcontractor from the HM Revenue & Customs (HMRC) website (PDF) - Opens in a new window.

Working with new contractors

When you start working for a new contractor, you must supply them with your name and UTR. If you are a sole trader, you must also supply your National Insurance number. If your business is a limited company, you must also provide your company registration number. The contractor will need to be satisfied that you are not viewed as an employee of their business and verify your details with HMRC. Payments will be made to you with the appropriate deductions made, or gross if that is what HMRC has agreed.

Statements of deductions

For each tax month you receive a payment where deductions have been made, you must receive a written statement of deduction from the contractor. This will show the gross amount for the job, the materials costs they have allowed and the value of the deductions that have been made. You must keep these statements - you will need to use them to help complete your self-assessment tax return.

Download guidance on working for new contractors from the HMRC website (PDF) - Opens in a new window.

Recording materials costs

It's a good idea to keep detailed records of your materials costs and submit them to contractors. If you do so, they can deduct the exact amounts from your payments. The items that can be excluded before your deduction is calculated are:

• materials
• consumable stores
• fuel (except fuel used for travelling)
• plant hire
• the cost of manufacture or prefabrication of materials

Register as a subcontractor

If you are paid by other people or businesses to carry out construction work, you are a subcontractor and need to register for the Construction Industry Scheme (CIS) as a subcontractor.

If you previously held a valid tax certificate or registration card under the previous version of the CIS, and these were valid on 5 April 2007, you do not need to reregister.

Registration is essential for new subcontractors. If you are not registered as a subcontractor, any payments made to you by contractors will have deductions made at the higher rate of deduction, which is currently 30 per cent.

Registering for the CIS

You can register for the CIS in two ways:

• by phone on the HMRC Construction Industry Scheme Helpline on Tel 0845 366 7899
• using application forms CIS 301, CIS302, CIS304 or CIS305, as appropriate. Copies can be downloaded from the HMRC website.

Applying to be paid gross

You can apply to HMRC to be paid gross by contractors (that is, without any deductions being made from your payments) and settle your own tax affairs. However, to gain authorisation to be paid gross, you must pass three tests - the business, turnover and compliance tests.

In the business test, you must be able to show that you are carrying out construction work in the UK and running your business through a bank account.

In the turnover test, you must be able to prove you have a minimum annual turnover gained through construction activities, not including material costs and VAT. The minimum turnover amount depends on whether you are a sole trader, limited company or partnership.

In the compliance test, you must be shown to have fulfilled all your tax, National Insurance and other obligations for the last 12 months.

Download guidance on applying to be paid gross under the CIS from the HMRC website (PDF) - Opens in a new window.