HMRC has always had the construction industry and sub-contractors in its sights! The rules and regulations of contractor status can be difficult, and it is sometimes hard to distinguish between who is a genuine subcontractor, and who should be an employee. Let us start with the basics:
What is a subcontractor?
A subcontractor is a business or a person who has agreed to perform construction operations for a contractor. A subcontractor can operate in many ways, including carrying work out themselves, using employees, or even other subcontractors.
Whereas an employee would have a contract of employment, a subcontractor should have a contract for services.
What you need to know
If you use subcontractors, there are some key facts you need to know, keep reading to learn more.
There’s no doubt that subcontractors can help facilitate the growth of your business. Whether you need a skilled expert to help complete a project or just an extra pair of hands, subcontractors can make a real difference to your ability to scale.
You may have been in business for a while and can remember a time when subcontractors were the answer to your prayers, or you could be starting your growth journey and exploring the possibilities. Either way, we have some top tips for you to build strong relationships to help build your business.
Let’s get started …
First, you should create a subcontractor agreement, providing the subcontractor with a description of the project they will work on. The agreement should clearly outline the relationship and cover the following:
- Objectives of the project
- Duties and timeline
- Fees and payment schedule
- Materials required and whether you or the subcontractor provide them
- How you will handle dispute resolutions
- Terms of contract termination
You’ll also need to make sure they have public liability insurance with a limit of indemnity that isn’t any less than your own, and it will need to cover the work you’ve contracted them to do.
Next, you will need to consider their payment status under the CIS…
What is the Construction Industry Scheme (CIS) and how does it affect paying subcontractors?
CIS applies to subcontractors within the construction industry.
It serves two main objectives; to minimise fraud levels and tax evasion within the construction industry and to help subcontractors spread their tax liabilities throughout the financial year.
There are some exceptions… CIS doesn’t apply to certain jobs, which include:
- Carpet fitting
- Delivering materials
- Architecture and surveying
- Making materials used in construction
- Working on construction sires that’s clearly not construction- for example running site facilities.
If you are considering using a subcontractor, you will need to register as a contractor with HMRC.
Do subcontractors pay tax?
Subcontractors tax depends on whether they are registered under the CIS or not. Those who are registered under CIS will either be paid gross (i.e. no tax deduction), or have 20% deducted from their invoices. Those who are not, will have tax deducted at a rate of 30%.
Whether they’re CIS registered or not, the part of the invoice that relates to tool hire or materials will not suffer any tax deductions.
Paying subcontractors under CIS
You’ll need their Unique Tax Reference number (UTR). This is provided by HMRC to someone when they first register as self-employed.
You will then use their UTR to verify their payment status with HMRC.
HMRC will come back with one of 3 options:
- Payment after deduction of tax at 20%
- Payment after deduction of tax at 30%
- Gross payment
It’s your responsibility to do this and make the necessary tax deductions each time a subcontractor is paid following receipt of their invoice.
The good news is you can use software to manage payments to subcontractors and related deductions. If you need help with this, get in touch with us and we’d be more than happy to assist.
If you require detailed information on the Construction Industry Scheme and when it applies, please call our team of experts today on 0191 374 0300.