Supporting Guidance: employer compliance: guidance by subject: construction industry scheme (CIS): payments to a third party
Occasionally a subcontractor may nominate a third party to receive payment on their behalf.
The way in which the payment is treated for CIS will depend on who the third party is.
Sometimes the third party will be a debt factor. A debt factor is a firm, usually a subsidiary of a large bank or financial institution that will purchase debts at a discount thereby improving the cash flow of the businesses from whom the debts are purchased.
A basic example
A contractor engages a subcontractor for work that will last 6 months.
The price for the job is £100,000 which will be paid in monthly instalments. The subcontractor needs to engage a workforce and purchase materials for the job.
The subcontractor engages a debt factor. The debt factor purchases the value of the invoices from the subcontractor and the subcontractor assigns all invoices for the job to the debt factor.
This means that the subcontractor could receive an immediate advance on the invoices from the debt factor of say 75% of their total, depending on the arrangement they have entered into. The debt factor then receives the monthly instalments from the contractor and when sufficient has been received will pay the subcontractor perhaps another 20% of the invoice totals, making a total of 95%.
The subcontractor benefits from the immediate cash advance of 75% on raising the invoices and is content to receive just 95% of the total in exchange for the up-front payment and guaranteed balance payment. The debt factor, meanwhile, keeps the extra 5% of the subcontractor’s invoices as commission payment.
Where the subcontractor has nominated a third party to receive payments the CI Caseworker should