Make deductions and pay subcontractors
When you pay a subcontractor, you usually make some deductions from their payments.
HM Revenue and Customs (HMRC) will tell you how much to deduct from a subcontractor’s payments when you verify them.
The Construction Industry Scheme (CIS) deduction rates are:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% if the subcontractor has ‘gross payment’ status - for example they do not have deductions made
You must pay these deductions to HMRC - they count as advance payments towards the subcontractor’s tax and National Insurance bill.
How to make a CIS deduction
To make a deduction from a subcontractor’s payment, start with the total (gross) amount of the subcontractor’s invoice.
Take away the amount the subcontractor has paid for:
- equipment which is now unusable (‘consumable stores’)
- fuel used, except for travelling
- equipment hired for this job (‘plant hire’)
- manufacturing or prefabricating materials
Only deduct materials the subcontractor has paid for directly. Ask the subcontractor for evidence that they paid for the materials if you’re unsure.
Finally, deduct the CIS percentage rate (as given to you by HMRC) from the amount left. You’ll be left with the net amount you need to pay the subcontractor.
You usually pay your subcontractors directly. But you can pay them through a third party (such as a relative or debt company) if they ask you to.
If you make deductions, you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.
ExampleIf the tax month was 6 May to 5 June, you must give the statement by 19 June.
If you’re not making payments
If you know you’re not going to make any payments to subcontractors for up to 6 months, you can ask for your scheme to be made ‘inactive’. HMRC will not send you any returns for that period.
You must file a return when you start paying subcontractors again.