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National Insurance Contributions

Subcontractors in the Construction Industry

National Insurance Contributions

Before you read this section you may want to have a look at how National Insurance contributions work. You can see straightforward guides for the employed and self employed by clicking on the appropriate link NIC for the employed or NIC for the self employed .

• Will salary sacrifice arrangements always be a good idea for low earners?

Caring for someone else and home responsibilities protection

I have not worked for some years because I was looking after my children. Does this mean I will not be entitled to state pension?

• Your state pension is made up of the basic state pension and the additional or second state pension. The full basic state pension is paid to people who have paid National Insurance contributions for enough qualifying years.



• The amount of NICs you have to pay in a year for it to be a qualifying year is 52 times the lower earnings limit for that year so for 2008/09 this would be 52 x £90.



• The additional state pension is earnings-related linked to the amount you have earned.



• The second state pension which replaced the state earnings-related pension (SERPs) on 6 April 2002, gives lower earners a higher additional pension than did SERPs.



• The fact that you have not worked for some years because you have been bring up children will not necessarily prevent you from qualifying for the state pension. This is because a person who is looking after children or a sick or disabled person may be entitled to home responsibilities for those years.

What is home responsibilities protection?

• Home responsibilities protection (HRP) reduces the number of qualifying years needed for the full basic state pension. Entitlement to HRP does not create a qualifying year. Instead, it reduces the number of qualifying years needed to qualify for the full basic state pension. The number of qualifying years can be reduced by up to 50 per cent.



• HRP is given automatically to people who are not able to work for a full tax year because of responsibilities at home. It is awarded to people who receive child benefit for a child under 16.

What happens if I cannot work because I am looking after another adult?

• Home responsibilities protection (HRP) is also given automatically to you if you were getting income support for a full tax year and you were not required to look for work because you were looking after a sick and disabled person.



• In addition, HRP is available if you are caring for a sick or disabled person who is paid attendance allowance, constant attendance allowance or disability living allowance at the middle or higher rate. However, in these circumstances it is not given automatically. Instead you will have to claim it.



• From April 2003 a registered foster parent can also claim HRP. Click the link here for more information on foster carers and NIC.

How do I claim HRP

• A person who is entitled to HRP for a tax year and who is not awarded it automatically must claim it on form CF411 which is available online on the HMRC website.



• The notes accompanying the form are available for download here.



• The form is also available from your local Department for Work & Pensions office.

Do I still get HRP if I work for part of the year?

• As HRP reduces the number of years needed to qualify for the full basic state pension it is awarded for complete tax years. HRP is either given for a complete tax year or not at all.



• If you work during a tax year, the availability of HRP will depend on whether you have qualifying earnings for that year and whether the year is a qualifying year.




• HRP is given to you if either you:

  • do no work at all during the tax year; or
  • do work, but do not earn enough to make the year a qualifying year.


• If you work and have paid enough contributions to make the year a qualifying year, the contributions will count for that year ahead of any HRP entitlement and the year will be a qualifying year.



• If you have worked for some of the year only, or have worked throughout the year and not earned sufficient for the year to be a qualifying year, HRP will be awarded instead. Contributions paid to create a qualifying year take priority over HRP.



• Remember that HRP is not the same as a qualifying year. A certain number of qualifying years are still need to gain entitlement to the full basis state pension. A pension cannot be awarded on HRP alone.



• So if some contributions have been paid for a year, in some circumstances, it may be worthwhile paying voluntary contributions to top up those paid so that the year becomes a qualifying year. Voluntary contributions (Class 3 NIC) are payable at a weekly rate of £8.10 for 2008/09. The HMRC website Shortfall in your National Insurance accounts and the payment of voluntary National Insurance contributions is helpful in getting out the points for and against making voluntary contributions to boost your state pension entitlement.



• A pension forecast (available by calling the Pension Service on 0845 3000 168) will help in making that decision. A pension forecast can also be obtained online. But bear in mind that HMRC's records may not always be accurate and it is worth keeping a record of your own contributions.




What about the state second pension?



• The state second pension is earnings-related. From April 2002, qualifying for HRP because you are getting child benefit for a child under the age of 6, or looking after a sick or disabled person (including a sick or disabled person over the age of 6) will build up entitlement to the state second pension. This is paid at the same time as your basic state pension.




What about married women paying reduced rate contributions?



• If you are a married woman who elected prior to April 1977 to pay reduced rate contributions - you are not entitled to HRP. Where you would otherwise be entitled to HRP, it may be worthwhile revoking the reduced rate election. Again, a pension forecast may assist you in reaching a decision. See also married women paying reduced rate contributions.

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Part time workers on low income

I currently work a few hours a week and keep my earnings below the lower earnings limit for National Insurance Contributions (NICs). I have been asked to work more hours, but am worried it will affect my NIC

• National Insurance contributions (NICs) buy benefit and pension entitlement. If you earn less than the lower earnings limit for Class 1 National Insurance purposes - you pay no NICs and you will not be entitled to contributory benefits.



• For state pension purposes, a year only counts as a qualifying year if sufficient contributions are paid for that year. Earnings below the lower earnings limit will not generate a qualifying year. However, if you look after a child or disabled person, you may be awarded home responsibilities protection for that year.



• Where earnings reach the lower earnings limit (£90 per week for 2008/09), you fall within the National Insurance system. However, no contributions are physically payable until earnings reach the earnings threshold (£105 per week for 2008/09).



• This means that for earnings between the lower earnings limit and the earnings threshold (£90 but not less than £105 per week for 2008/09), you enjoy the benefits of the National Insurance system without the costs. Contributions are payable at an effective nil rate, but this buys entitlement to contributory benefits and the state pension.




Example Lucy currently earns £70 per week from her part-time job. She currently pays no tax or National Insurance. Her employers offers her some additional hours. If she accepts the additional hours she will be paid £95 per week. She is worried that this will mean that she will have to pay National Insurance and the additional work will not be worthwhile. At present Lucy's earnings are below the lower earnings limit for National Insurance contributions. This means that she is not entitled to contributory pensions and will not be accruing qualifying years for state pension purposes. By increasing her hours, Lucy's earnings will rise above the lower earnings limit for National Insurance purposes. However, as her earnings are below the earnings threshold of £105 per week, her contributions are at the nil rate. This means she effectively gains entitlement to contributory benefits and potentially a qualifying a year for state pension purposes, without having to physically pay out anything in terms of National Insurance contributions. She is also not earning enough to pay any tax so she will be able to keep the whole of her £95 per week. However, if her earnings increase above the earnings threshold (currently £105 per week), she will have to start paying National Insurance contributions at 11% and PAYE tax (depending on her tax code) on the excess over £105 per week.




• Therefore, if it is possible for you to work additional hours to bring earnings between the lower earnings limit and earnings threshold, this will be beneficial and will give you the benefits of the National Insurance system for no extra cost.



• It is worth bearing in mind that if you are claiming Working tax credit you are entitled to be paid maximum credit until your earnings rise above £6,420 a year, which is equivalent to just over £123 per week. Above that amount , your tax credit entitlement is progressively withdrawn by 39p for every £1 by which your earnings exceed £6,420 a year.



• Once earnings reach the earnings threshold, National Insurance contributions are payable on earnings above the earnings threshold at the main Class 1 NIC rate.

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Married women paying reduced rate contributions

Who can pay reduced rate contributions?

• A women who married before 6 April 1977 could elect by 12 May 1977 to pay reduced rate Class 1 contributions. The reduced rate for 2008/09 where a valid election remains in force is 4.85%. The reduced rate applies on earnings between the earnings threshold and the upper earnings limit (for 2008/09, between £105 per week and £770 per week).




Example Janet has a reduced rate election in force. In a particular week in 2008/09 she earns £505. She must pay Class 1 contributions of £19.40, being (£505 - £105) @ 4.85%.




• In the event that you have a valid reduced rate election and earn more than the upper earnings limit, Class 1 contributions are payable on the excess at 1%. This is the normal rate applying on earnings above the earnings limit.




Example Barbara has a reduced rate election in force. In a particular week in 2008/09 she earns £1,000. She pays Class 1 contributions of £34.55 made up of: (£770 - £105) @ 4.85% (£1,000 - £770) @ 1%




• If you are a woman with a valid reduced rate election and are self-employed, you do not need to pay Class 2 contributions. However, Class 4 contributions remain payable if your profits exceed the lower profits limit (£5,435 for 2008/09).

Can the right to pay reduced rate contributions be lost?

• As a woman you will lose the right to pay reduced rate contributions in the following circumstances:

  • if you divorce (entitlement lost from the date of decree absolute);
  • if your marriage is annulled; or
  • if there have been two consecutive tax years since 1978 where you have neither paid, nor been treated as having paid, Class 1 contributions or been self-employed.




• The obligation to inform your employer that you are no longer entitled to pay reduced rate contributions on divorce falls on you. The relevant section of the certificate of election should be completed and sent to:

  HMRC
  National Insurance Contributions Office
  Contributor Caseworker
  Benton Park View
  Newcastle upon Tyne
  NE98 1ZZ

Am I entitled to benefits if I pay reduced rate contributions?

• If you are a woman paying reduced rate contributions, you are entitled to a basic state pension of 60% of your husband's entitlement based on his NIC record. As a woman you can claim your pension at the time your husband reaches 65 and claims his state pension and you reach state pension age yourself. The earliest you can claim your pension based on your husband's contributions is when your husband is 65 and you are 60.



• If you are a woman paying reduced rate contributions, you are also entitled to Statutory Maternity Pay, Statutory Sick Pay, Statutory Adoption Pay and Statutory Paternity Pay. These are earnings-related rather than contribution based.



• However, if you are paying reduced rate contributions, you are not entitled to any contributory benefit based on your own contributions, or to National Insurance credits (which offer protection of the NIC record to those out of work due to unemployment, illness and disability) nor to home responsibilities protection (HRP).

Are there advantages in revoking the reduced rate election?

• This may be advantageous in certain circumstances:

  • Revoking the election and paying standard rate contributions will create an entitlement to contributory benefits. These include incapacity benefit, and contribution-based jobseeker's allowance.
  • Revoking the election and paying standard rate contributions may also enable you to obtain the basic state pension, and possibly the second state pension, in your own right. If you care for a child or sick or disabled person, it will also enable you to benefit from home responsibilities protection.



• You can start to pay standard rate Class 1 NICs or Class 2 NICs from the beginning of the week after the form is received in the National Insurance Contributions Office or at the beginning of any later week that you request on the form.



• If you make the change near the end of the tax year and you have not paid enough NICs for that year to count towards your basic State Pension, you will have the choice to pay voluntary Class 3 NICs to make up the shortfall. You will not be able to pay voluntary Class 3 NICs for any tax year during the whole of which you have a valid reduced rate election.



• You need to bear in mind that once you have given up the right to pay reduced rate NICs, you cannot change back.



• Obtaining a pension forecast should assist you in making this decision (contact the Pension Service on 0845 3000 168) or you can obtain this online.

Will I have less money in my take home pay if I revoke the election?

• If your earnings are between the lower earnings limit (£90 per week for 2008/09) and the earnings threshold (£105 per week for 2008/09), contributions are payable at the zero rate irrespective of whether there is an election in force. Revoking the election will cost you nothing in terms of additional NICs, yet will provide entitlement to contributory benefits, HRP and possibly a state pension.



• If you earn more than the earnings threshold, you will pay standard rate contributions of 11% on earnings between the earnings threshold and the upper earnings limit rather than reduced rate of 4.85%. Again, a pension forecast should help you decide whether this cost is worthwhile.




Example Claudia has a reduced rate election in force. She earns £500 a week. She is thinking of revoking the election to increase her benefit and pension entitlement and wants to know how much extra NICs she will pay. With the election in force, she pays reduced rate contributions of £19.16 per week (4.85% of (£500 - £105)) on her earnings of £500. If she were to revoke the election she would pay standard rate contributions at 11% on earnings in excess of the earnings threshold, currently £105 per week. This means she would pay National Insurance contributions of £43.45 ((£500 - £105)@11%). Revoking the election would cost £24.29 per week (£43.45-19.16) or £1,263.08 a year) more in NICs.




• Once the election is revoked, it cannot be reinstated. This means that the decision must be considered carefully before it is made as it cannot be reversed at a later date.



• To cancel the election, you must complete form CF9 and send it to the National Insurance Contributions Office (NICO) at the address above.



• Standard rate contributions ate payable from the start of the week after the form is received by NICO.

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Incorporation and NICs

I am thinking of incorporating my business. What are the NIC implications?

• If you are self employed you pay Class 2 NICs (£2.30 a week for 2008/09), unless your earnings are below the small earnings exception (£4,825 for 2008/09). You will need to complete form CF10 if your earnings are below £4,825 in order to be exempt from paying Class 2 contributions.



• Class 4 NICs are also payable if your profits exceed the lower profits limit (£5,435 for 2008/09). They are payable at a rate of 8% on profits between the lower profits limit and the upper profits limit (£40,040 for 2008/09) and at a rate of 1% on profits above the upper profits limit.



• When the business is incorporated, you will stop being self-employed. Instead, usually, if you incorporate a business, you will be a director of the company that you create and therefore if you are paid a salary you will then become an employee of the company



• Your earnings, in the form of salary or wages and some benefits are liable to Class 1 NICs. Your company as your employer pays secondary Class 1 NICs on your earnings above the earnings threshold at the secondary rate (12.8% for 2008/09) and your pay primary Class 1 NICs on your earnings above the earnings threshold.



• If you get any benefits from the company as your employer e.g. use of a car or fuel, a Class 1A liability, payable by your employer may arise on those benefits.



• So overall this means that instead of paying flat rate Class 2 contributions plus Class 4 contributions on your profits, primary and secondary Class 1 contributions will be payable on your salary or wages or other earnings and Class 1A contributions may be payable if benefits in kind are provided.

What happens if dividends are paid instead of salary?

• It is very common for a company to pay dividends instead of a salary. This can be have advantages and disadvantages for tax and NIC for both you and the company.



• NICs are not payable on dividends as they are not considered to be earnings. This means a payment of a dividend can save NICs of 23.8% (12.8% employer contributions and 11% employee contributions) as compared to a payment of salary or wages. This is a considerable saving.



• However it is not all good news! To maintain a contributions record and entitlement to the state pension and contributory pensions, you must be within the National Insurance system. If only dividends are paid, your earnings will be below the lower earnings limit for NICs purposes. A year in which only dividends are paid will not be a qualifying year and your contribution record will be affected.



• Although the year may qualify for home responsibilities protection if you are in receipt of child benefit or looking after someone who is sick or disabled, this serves only to reduce the number of qualifying years needed.This is not the same as a qualifying year where contributions are not payable.



• However, there is a solution.



• NICs are payable at a zero rate on earnings between the lower earnings limit (£90 per week for 2008/09) and the earnings threshold (£105 per week for 2008/09). Contributions at the lower rate are sufficient to create a qualifying year without any associated NIC cost to either you or your employer.



• The solution is therefore for your company to pay you a small salary of between the lower earnings limit (£90 per week for 2008/09) and the earnings threshold (£105per week for 2008/09). Additional money can be taken out in the form of dividends.



• The earnings attract NICs at the zero rate, but create a qualifying year for state pension purposes and entitlement to contributory benefits.




Example James incorporates his business. He pays himself a dividend of £50,000. This has no associated NIC liability. However, if no NICs are paid for a year, the year is not a qualifying year and this may have implications for pension and benefit entitlement. If instead, James pays himself as salary of £400 per month (£4,800 a year) and dividends of £45,200 he will still pay out no NICs, but will get the benefit of having a qualifying year for NIC purposes. This is because his earnings are above the lower earnings limit (so he is in the NIC system) but below the earnings threshold (meaning he is not paying yet paying contributions at a positive rate). As an employer he must however, remember to complete form P35 and P14 by 19 May following the end of each tax year to ensure that his NIC record is credited. Form P35 is the employer's annual return of tax and NICs deducted from all employees and form P14 is the year end summary of pay and deductions made from an employee - the form P14 comes in a number of parts - one of which is form P60 which is given to all employees after the end of the tax year and is their record of the pay and tax deducted in the previous year. You can get the forms from the HMRC orderline or you can order them online here.




• Where the route in the example for James is taken, it is important that forms you complete forms P14 and P35 at the end of each tax year. As mentioned above the forms must be completed by 19 May following the end of the tax year.



• Without the P14, your National Insurance record will not be updated and the benefit of the zero rate contributions may be overlooked.



• It does not matter that your company has nothing to pay over to HMRC. The forms must still be completed each year to ensure your NIC record is kept up to date.



• For tax credits purposes, both salary or wages and dividends are counted as income - salary as income from your employment and dividends as investment income.

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Salary sacrifice, low earnings and NICs

Will salary sacrifice arrangements always be a good idea for low earners?

• No - salary sacrifice will not always be a good idea and there is one particularly unfavourable situation set out below but it can benefit you in some circumstances.


Many employers offer a salary sacrifice scheme that enable an employee to swap cash salary for non-cash benefits. The idea is that the employee can save tax and NICs and will be in a better position overall than if he had merely purchased the benefit from the after tax salary. This can be particularly efficient where the benefit is exempt from tax and NICs although it is important to ensure that your tax credit entitlement is not reduced as a result - more information on this in the third bullet point below.


• Even if the benefit provided in exchange for the cash salary is not exempt from tax and NIC, the employee will normally save NICs. The cash salary will attract Class 1 contributions, whereas most benefits attract employer-only Class 1A, thereby saving the employee the primary Class 1 liability.



• Although this sounds attractive, the benefits for low earners are limited. If earners are between the lower earnings limit and the earnings threshold, switching from cash to benefit will not save NICs, as contributions in this band attract a nil rate.



• More dangerous is the scenario where the salary sacrifice reduces earnings below the lower earnings limit. This will take the employee out of the NIC net and in doing so will mean that the employee will lose entitlement to contributory benefits and the state pension. This is a particular worry if the pre-sacrifice salary was between the lower earnings limit and the NIC threshold where you would have been entitled to benefits as a result of your contributions without actually paying them.




Example Kerry earns £125 per week. She has a child at nursery. He employer suggests a salary sacrifice scheme whereby she gives up cash salary for childcare vouchers as this will save her tax and NICs. At present, she pays National Insurance at the standard rate on earnings above £105 per week. This equates to contributions of £2.20 per week. If she exchanges £50 of cash salary for £50 of nursery vouchers each week, she will have cash earnings of only £70 per week. This will take her earnings below the lower earnings limit and outside the National Insurance system. This will adversely effect entitlement to contributory benefits, Statutory Maternity Pay, Statutory Sick Pay, Statutory Adoption Pay and also her state pension entitlement. It would also reduce Kerry's entitlement to tax credits on her childcare costs, because you cannot claim tax credits on childcare costs which are funded by someone else (e.g. by your employer). She would therefore lose £40 in tax credits - 80% of the childcare costs of £50 - and gain only £2.20 NICs and £1.95 tax each week.




• For more information on how tax and NI-free childcare vouchers interact with your tax credits please have a look at two of our articles Urgent health warning for Childcare Vouchers and Childcare vouchers warning - again.



• In addition, if as an employee you are offered tax-free and NIC-free childcare vouchers, accepting them might reduce your tax care entitlement.

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Subcontractors in the Construction Industry

The Construction Industry Scheme (CIS)

Overview of the scheme

Registration requirement

Will I need to register as a subcontractor under the CIS scheme?

How do I register as a subcontractor?

Gross payment conditions

What conditions must be met in order for a subcontractor to qualify for gross payment?

What happens if the gross payment conditions are not met?

Verification of subcontractors

How will the contractor know whether to pay me gross or under deduction of tax?

How does the verification process work and what information does the contractor need?

Subcontractor information

As a subcontractor what information will I receive from a contractor?

What does the contractor do with the sums deducted from me as a subcontractor?

Returns & repayments

As a subcontractor do I need to make any returns to HMRC?

Can repayments be claimed during the tax year?

Further help

Where can I get further help on the new CIS?

The Construction Industry Scheme (CIS) from 06 April 2007

Overview of the new scheme

Registration requirement

Will I need to register as a subcontractor under the new CIS scheme?

• As a subcontractor, you must be registered with HMRC.



• If you are a new subcontractor and you start working in the construction industry on a self-employed basis on or after 6 April 2007, you will need to register for the new CIS.



• If you fail to register with HMRC, you will suffer from a higher rate of deduction on payments made to you.

How do I register as a subcontractor?

• You can register with HMRC, either for payment under deduction or for gross payment. You will only be eligible to register for gross payment if the conditions for gross payment (see gross payment conditions) are met.



• If you do not pass the gross payments tests, you will be registered for payment under deduction.



• As mentioned before if you do not register, you will suffer deductions at the 30% higher rate instead of the 20% lower rate set for those subcontractors who are registered under deduction.



• If you want to register for the scheme, you should call the CIS helpline on 0845 366 7899.



• If you have not paid tax or National Insurance before, you will be asked to go to a local tax office for an identity check. To satisfy the identity check, it will be necessary to produce at least two original documents showing your identity. Photocopies are not acceptable.




• The following are acceptable documents for the purposes of proving identity:

  • birth certificate;
  • any letters from the Department for Work and Pensions (DWP) showing your National Insurance number;
  • a utility bill, such as a gas or electricity bill, showing your current address;
  • a council tax bill showing your current address;
  • a passport; or
  • a driving licence.

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Gross payment conditions

What conditions must be met in order for a subcontractor to qualify for gross payment?

• You may be paid gross or under deduction on account of tax and National Insurance. Certain conditions must be met if you are to be eligible for gross payment.



• If you are paid gross - you are paid the full amount due to you by the contractor. The contractor does not withhold amounts on account of tax and National Insurance contributions.




• To qualify for gross payment under the CIS scheme, you must meet three tests:

  • the business test
  • the turnover test
  • the compliance test


• The tests look at a 12-month window.




• Business test

  To meet the business test, you must demonstrate to HMRC that you have a business carrying out construction work in the UK or providing labour for such work which is run through a bank account.




• Turnover test

  The turnover test is based on your net turnover from construction work in the 12 months prior to the application for gross payment.

  Net turnover from construction work is gross income from construction work, less VAT and the cost of materials.

  For example, if you had gross income of £40,000 and spent £15,000 on materials, your net income for the purposes of the turnover test would be £25,000 (£40,000 - £15,000).

  There are two turnover tests - the standard turnover test and the alternative turnover test. The tests that are available depend on the nature of your business.

  Standard test

  • Individuals
    
    

    If you are in business by yourself you must pass the standard turnover test. To do this you must demonstrate that your business had net construction turnover of at least £30,000 in the 12 months prior to the gross payment application.

  • Partnerships
    
    

    To pass the standard test, a partnership must be able to show that it has net construction turnover for each partner of at least £30,000 in the 12 months prior to making the gross payment application.

    This means, for example, a partnership with four partners would need turnover of at least £120,000 (4 x £30,000) for the 12 months prior to the application in order to pass the standard turnover test.

  The alternative test

  • Partnerships
    
    

    Partnerships can take either the standard test or the alternative test.

    The alternative test requires that the partnership demonstrate net construction turnover of at least £200,000 in the 12 months prior to the partnership application.

    The alternative test is an easier test for partnerships with seven or more partners.

  
  

• Compliance test

  • The final test is the compliance test. This requires that you and any business, have done each of the following in the 12 months prior to the date of application:

    • completed and returned all tax returns sent;
    • supplied any information to do with tax requested by HMRC;
    • paid all tax due personally in respect of the business by the due date;
    • paid personal National insurance contributions due and on time;
    • paid all pay tax and NICs due by you or your business/company as an employer on time; and
    • paid any deductions due from you or your business/company as a contractor in the construction industry on time.
  
  
  • In determining whether the compliance test is met, HMRC will disregard all or any of the following during the same 12 month period:
    • three late submission of the monthly return, up to 28 days late;
    • three late payments of CIS/PAYE deductions, up to 14 days late;
    • any employer's end of year return made late;
    • any late payments of corporation tax up to 28 days late, including interest on the payment, but no penalty;
    • any self-assessment return made late; and/or
    • any failures regarded as `minor and technical' in relation to the old scheme where these fall within the 12 months preceding the application.

What happens if the gross payment conditions are not met?

• If the gross payment conditions are not met and you apply to HMRC for registration under the new scheme, HMRC will register you for payment under deduction of tax.



• This means that the contractor will need to deduct an amount on account of tax and National Insurance when making payments to you as a subcontractor.



• The rate has been set at 20% from 6 April 2007.



• If you are not registered with HMRC, the contractor will be required to make deduction at the 30% higher rate.

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Verification of subcontractors

How will the contractor know whether to pay me gross or under deduction of tax?

• There are three possible ways to pay you as a subcontractor:

  • you are registered with HMRC for gross payment and are paid gross;
  • you are registered with HMRC for payment under deduction and the lower 20% rate of tax applies;
  • you are not registered with HMRC and payments are subject to deduction on account of tax and NICs at the 30% higher rate.


• A verification process applies - the contractor is responsible for verifying you as a subcontractor with HMRC.



• The verification process enables the contractor to check that you are registered with HMRC for the CIS scheme and whether he or she should pay you gross or under deduction.




• In certain cases, the contractor will not need to verify your status with HMRC. Verification is not required if:

  • the contractor paid you during 2007/08 (the first year of the new CIS scheme) and you have already been included in a monthly return made by the contractor in that tax year;
  • the contractor has paid you since 6 April 2005 and at the time that the last payment was made, you had a registration card CIS4(P), a temporary registration card, CIS4(T), with an expiry date of April 2007 or later, or a tax certificate, CIS5 or CIS6, with an expiry date of April 2007 or late.


• In all other cases, the contractor must verify your status as a subcontractor with HMRC.



• However, if the contractor is part of a group of companies and you have been included in a monthly return made by one of the other companies in the group within the current or previous two tax years, the contractor does not need to verify your status.

How does the verification process work and what information does the contractor need?

• In order for the contractor to verify you as a subcontractor with HMRC, the contractor will need to supply HMRC with:

  • your name
  • your unique taxpayer reference (UTR);
  • your account office reference and
  • your employer reference.


• The contractor will also need to supply various information in relation to each subcontractor in respect of whom verification is sought. The exact information required will depend on the nature of the subcontractor's business.




• If you are in business by yourself - a sole trader, the contractor will need to supply:

  • your name;
  • unique tax reference (UTR) and
  • your National Insurance number, if known.



• If you are a partner in a firm, the contractor will need to supply:

  • the firm's name;
  • your name as a partner;
  • the firm's self assessment tax reference;
  • your unique tax reference or National Insurance number.


• For companies, HMRC will need the unique tax reference and company registration number.



• In all cases the contractor must confirm that a contract has been agreed with each subcontractor or that the contactor has formally accepted a tender for work under contract.




• The contractor can contact HMRC in various ways in order to perform the verification check. The options include:

  • phoning HMRC on 0845 366 7899;
  • online;
  • using appropriate third party software or;
  • using electronic data interchange.


• HMRC will check their records and advise the contractor whether you are to be paid gross or under deduction.



• If HMRC have no record of you as a subcontractor because you have not registered, or are unable to find your records because the information supplied by the contractor is either incomplete or incorrect, HMRC will advise the contractor to make deductions at the higher 30% rate from payments made to you as the subcontractor.



• HMRC will give the contractor a verification reference number. An example might look like V0000543267. A single verification number will apply to all subcontractors verified at the same time.



• However, if the contractor is advised to apply the higher 30% tax rate to you, you will be given a unique verification reference. This will be the same as the standard verification reference, but with one or two letters at the end, e.g. V0000543267/C.



• The contractor must keep a note of the verification numbers given.


It is particularly important that the contractor records the unique verification numbers applying to subcontractors for whom deduction at the higher 30% rate is specified as these must be included on the contractor's monthly return and one payments statements given to subcontractors.

Once you have been verified, the contractor does not need to verify you again as long as the last payment that the contractor made to you as a subcontractor was made in the current or previous two tax years. If a greater time period elapses between payments, the contractor will need to re-verify you.

Once HMRC have instructed the contractor how to pay you (i.e. gross or under deduction), the contractor must pay you in this way, unless instructed otherwise by HMRC.

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Subcontractor information

As a subcontractor what information will I receive from a contractor?

• Under the current CIS scheme there are no vouchers.



• Instead, if payment has been made under deduction, the contractor must supply you with a statement detailing how much has been paid and what deductions have been made, if any.



• The contractor must supply you with such a statement for each tax month.



• Alternatively, the contractor can give you a statement each time that a payment is paid, if you are paid more frequently than once in a tax month. A tax month runs from 6th of the month to following 5th of the month (e.g. 6 August to 5 September).



• If deduction has been made at the higher 30% rate, the statement must include your unique subcontractor's verification number. This is important, as the number is needed if you need to claim a refund.



• The contractor does not need to provide a statement to you if payment is made gross.

What does the contractor do with the sums deducted from me as a subcontractor?

• Unless you are registered for gross payment, the contractor will be advised to make deductions from amounts paid to you.



• If you are registered with HMRC, the contractor will be advised to make deductions at the lower 20% rate.



• If the contractor is not registered with HMRC, the contractor will be advised to make deductions at the higher 30% rate and will be given a unique verification number for you.




• The contractor is required to make a monthly return to HMRC. The return must record:

  • all payments made to all subcontractors within the terms of the CIS scheme;
  • details of any deductions made from payments to subcontractors;
  • a declaration confirming that the employments status of the subcontractors has been considered and a declaration that the verification process has been correctly applied.


• The contractor can make the return electronically or on paper. It must reach HMRC no later than the 19th of the month. This means that the return must for the tax month ending on 5 May must be reach HMRC by 19th May.



• Penalties will be charged for returns received late.



• If the contractor has not made any payments to subcontractors during the tax month in question, a nil return must be submitted.



• The sums deducted from payments to subcontractors on account of tax and National Insurance must be paid over to HMRC.



• Payment must be made by 22nd of the month if made electronically and 19th month is not paid electronically (e.g. by cheque).



• This means that the deadlines for paying deductions over to HMRC in respect of sums deducted from you in the tax month ending of 5 October are 22 October if payment is made electronically and 19 October if payment is made otherwise.

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Subcontractor compliance

As a subcontractor do I need to make any returns to HMRC?

• A return must be completed each year. The type of return will depend on whether the subcontractor is an individual, a partnership or a company. For example, if you are a subcontractor in business by yourself, you will need to complete the individual self-assessment return.



• The deductions made from payments to you may not necessarily match the your tax and National Insurance liability exactly. If more has been deducted from payments, the excess will repaid by HMRC.



• If you owe more tax and National Insurance that has been deducted from payments made by contractors, you will be asked to pay the shortfall.



• Your overall tax position will become clear once the self-assessment return has been completed.



• If you have been paid gross, tax and Class 4 NICs will be due on the normal due dates under the self-assessment system.

Can repayments be claimed during the tax year?

• It may be possible for you to claim a repayment from HMRC during the tax year.



• If you have an accounting period that ends early in the tax year, for example, 30 October, and you think that deductions made from payments made by contractors exceed the tax and Class 4 National Insurance liability for the tax year, you can apply to HMRC for a repayment.



• In-year repayments can only be made to subcontractors who are individuals or subcontractors that are partnerships.



• Sole traders should apply for the repayment on form CIS40 and partners on form CIS41.



• Application forms and advice are available from the CIS helpline on 0845 366 7899.



• Subcontractors that are companies cannot claim in-year repayments. However, companies can offset deduction made by contractors from payments made to them against payments of PAYE and NIC that they must make to HMRC.

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Further help

Where can I get further help on the CIS?

• Guidance on the CIS is available on the new CIS pages of the HMRC website CIS pages of the HMRC website .



• The site contains information on the scheme, including a guidance booklet - CIS340, Construction Industry Scheme - Guide for contractors and subcontractors , a range of factsheets and frequently asked questions.



• HMRC also operate a helpline on the new CIS on 0845 366 7899.



• Help is also available from the business support teams, who also run various seminars and presentations. You can find more information on this here.



• If you need help to complete your self-assessment return, you can contact the self-assessment helpline on 0845 9000 444.

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