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HMRC internal manual

Construction Industry Scheme Reform Manual

The Scheme: subcontractors: introduction

Businesses and other concerns in the construction industry are known as ‘contractors’ and ‘subcontractors’. They include companies, partnerships and self-employed individuals. Contractors pay subcontractors for construction operations.

Subcontractors can also be contractors at the same time.

The Construction Industry Scheme does not apply to construction operations carried on outside the United Kingdom. ‘United Kingdom’ means Great Britain and Northern Ireland; it does not include the Irish Republic, the Isle of Man or the Channel Islands. It does include the territorial waters of the United Kingdom which, for the purposes of the Scheme, should be regarded as extending only 12 miles from the high watermark.

A subcontractor who meets certain qualifying conditions may be paid gross by the contractors for whom they work. Where the subcontractor does not meet those conditions they can only be paid after a deduction has been made from the payment.

If the subcontractor has not registered with HMRC, then the deduction that a contractor has to make from payments to that subcontractor must be at a higher rate than the standard deduction rate.

See CISR43000 onwards for the section detailing the procedure for examining applications for gross payment and the following sections for the conditions to be met in the approval process:

  • Turnover Test (see CISR44000 onwards)
  • Business Test (see CISR45000 onwards)
  • Compliance Test (see CISR46000 onwards).

Where the individual, partnership or company passes these tests, the contractor can pay them gross, that is, with no deductions taken from the payment. This also applies to bodies deemed ‘gross’ such as local authorities and other public bodies (see CISR13040).

Where a subcontractor may only be paid under deduction, the contractor must make a deduction from the amount of the payment, less the direct cost of any materials (exclusive of VAT) made to that subcontractor. That deduction is made on account of the subcontractor’s tax and Class 4 NIC liabilities, if the subcontractor is an individual or, on account of liabilities as an employer or contractor, if a company.

Status of subcontractors

Once registered for CIS, for either gross or net payment, it does not mean that every contract undertaken by the subcontractor can be taken to be one of self-employment.

In some cases the subcontractor’s status may be that of an employee. In those circumstances the employer should operate PAYE on any payments under that contract. If you receive enquiries about a subcontractor’s employment status you should consider issuing the following HMRC leaflets which can be found in SEES:

  • ES/FS1 ‘Employed or self-employed for Tax and National Insurance contributions’ - this leaflet is aimed at workers.
  • ES/FS2 ‘Are your workers employed or self-employed for Tax and National Insurance contributions’ - this leaflet is aimed at employers / contractors.