Subcontractor – What is a subcontractor?
A subcontractor is a company or individual that is employed to carry out part, or all, of another party’s contract.
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Traditionally, subcontracting was most common in the construction and engineering sectors; however, today, subcontracting is also popular in many newer industries, such as data science and IT development.
Subcontractor vs. contractor
A contractor is an individual or business that works on a contractual basis, which means that they negotiate deals with different clients for specific jobs or projects.
A subcontractor is a type of contractor as they also work on a contractual basis; however, subcontractors negotiate deals and form agreements with contractors rather than end customers.
Furthermore, while contractors usually take responsibility for an entire project, subcontractors usually specialise in one specific area. A contractor may therefore employ several subcontractors to work on different aspects of one project or job.
For example, a contractor builds houses. They form an agreement with a customer who is looking for a new home. The contractor is paid by the customer. The contractor then hires a subcontractor that specialises in fitting windows, a subcontractor that installs bathroom fixtures, and a subcontractor that works with flooring. The subcontractors all have individual agreements with the contractor, who also pays their fees.
Subcontractor under CIS
In the UK, the Construction Industry Scheme (CIS) is a system for paying subcontractors that work on construction projects for commercial or residential buildings and civil engineering projects such as roads and bridges.
Under CIS, contractors usually take decuctions from the money they pay to subcontractors and pass these deductions on to HMRC. The money deducted from subcontractors’ pay is then put towards their tax and National Insurance payments.
However, some CIS subcontractors can qualify for ‘gross payment status’, which means that contractors do not make deductions from their pay. Instead, subcontractors with gross payment status pay their tax bill in full at the end of the tax year.
How to register as a subcontractor under CIS
Contractors need to register for CIS if they work in the construction industry and employ subcontractors. Subcontractors are not required to register for CIS, but if they don’t, their deductions will be charged at 30% instead of 20%.
You can register as a subcontractor under CIS through HMRC’s self-service website. Bear in mind that in order to register as a CIS subcontractor, you will need to provide a few different pieces of information:
- Your business’s registered name
- Your National Insurance Number
- Your business’s Unique Taxpayer Reference (UTR number)
- Your business’s VAT registration number (if you’re VAT registered)
If you don’t have a UTR, you will first need to register as a new business under Self Assessment. When you do this, you’ll be asked whether you work as a subcontractor. By indicating that you do subcontracting work, you’ll be reigstered for Self Assessment and CIS at the same time.
If you’re a subcontractor that does work in the UK but is based in another country, you will still need to register for CIS. You can find out more about registering for CIS as a business based outside of the UK on HMRC’s website.
How to verify a subcontractor under CIS
Contractors are responsible for paying their subcontractors, but before they can do this, they need to ‘verify’ the subcontractor with HMRC. When a contractor verifies a subcontractor, HMRC tells them whether the subcontractor is registered for CIS and which deduction rate to use (20%, 30%, or 0% when gross payment status applies).
Contractors can verify subcontractors using either HMRC’s free, online CIS service or commercial CIS software. Commercial CIS software is optional for contractors verifying 50 subcontractors or less, but compulsory for contractors that have to verify more than 50 subcontractors.
Subcontractors and tax
Usually, if you’re registered as a subcontractor under CIS, the contractors you work for will make deductions from your pay throughout the year, which go towards your yearly tax bill. However, if you’re a CIS subcontractor that has gross payment status, you will not have deductions taken from your pay, so you will need to pay your tax bill in full at the end of the tax year.
Whether or not they have gross payment status, CIS subcontractors are still responsible for ensuring they pay the right amount of tax, and – like other self-employed people – CIS subcontractors can work out whether they have paid the right about of tax through yearly tax returns.
Tax returns for subcontractors registered as sole traders and partnerships
If you’re a CIS subcontractor registered as a sole trader or partnership, you can work out whether you have paid the right amount of tax through your yearly Self Assessment tax return. You should enter the deductions contractors have made to your pay in the ‘CIS deductions’ field.
HMRC will then calculate how much tax you owe and take the deductions from your total bill. If you still owe money, you need to pay this to HMRC. If you have paid too much, you will get the money refunded by HMRC.
Tax returns for subcontractors registered as limited companies
If you’re a CIS subcontractor registered as a limited company, the way you report and pay tax depends on whether you have gross payment status.
If you’re a CIS subcontractor registered as a limited company and do have gross payment status, you should report your income through your Corportation Tax return. However, those without gross payment status can claim back CIS deductions through their company payroll scheme.
CIS subcontractor allowable expenses
All companies incur costs, and some business-related expenses are not taxable – these are known as allowable expenses. Travel costs, clothing, marketing costs, and raw materials are all considered allowable expenses.
The following items are a few examples of allowable expenses commonly purchased by CIS subcontractors:
- Protective clothing (e.g. helmets, goggles, high-visibility jackets, boots)
- Fuel, insurance, and road tax for any vehicles used for work
- Tools and equipment used to complete your work, plus maintenance costs
Subcontractors registered as sole traders and partnerships can claim their allowable expenses through their Self Assessment tax return. The rules for limited companies are slightly more complicated, but HMRC has more information about allowable expenses for limited companies.
Subcontractors and invoicing
In order to get paid, subcontractors need to issue invoices to the contractors they work for.
Every invoice you issue needs to include some basic information, including:
- An invoice number: a unique code that follows a sequential order
- An invoice date: the date that your invoice is issued
- A due date: the date the invoice is due
- Seller details: your contact details
- Buyer details: your contractor’s contact details
- Description of the services provided: including a name, quantity, and price per unit
- Subtotal: the total amount due before tax and deductions
- Sales tax: the amount of VAT due
- Total: the total amount due after tax and deductions
Invoice templates for CIS subcontractors
If you're a subcontractor under CIS, you need to use a specific invoice template for CIS subcontractors that includes information about CIS deductions as well as the basic information outlined above.
Also bear in mind that if you don’t give the contractor the exact legal business name that you gave HMRC when you registered for CIS, you might get charged the higher deduction rate.
One of the easiest ways to create an invoice is with online invoicing software like Debitoor, and because Debitoor is set up for CIS, you can create invoices with CIS deductions with just a few clicks.