Download our CIS Flowchart to help you through the process. Following on from part 1 where you should have decided whether CIS was applicable to you or not we are now going to take you through the CIS registration process and record keeping for a Contractor. If you think you are a Subcontractor please go straight to part 3.

Registering as a CIS Contractor
Checking Subcontractors employment status and verifying them
Paying Subcontractors and making deduction under CIS
Paying over deductions to HMRC
Deduction statements and monthly returns
Record keeping under CIS

Registering as a CIS Contractor

All contractors covered by CIS need to register with HMRC. If you’re a contractor under CIS you’ll need to register with them before you take on your first subcontractor.

Register through HMRC’s website you’ll need to put in some details online. The details you’ll need depend on the type of business you’re registering. But they’ll include things like:

your unique taxpayer’s reference
key individuals’ National Insurance numbers
the registered business name and contact details

Tick the box to show you’re going to be engaging subcontractors in the construction industry. When you submit the online form details will be emailed securely to HMRC.

HMRC will set up a contractor scheme for your business – and a PAYE (Pay As you Earn) scheme if you asked for one – and send you a contractor’s pack. The pack contains all the information and forms you’ll need to start working as a CIS contractor.

Checking Subcontractors employment status and verifying them

You may need to ‘verify’ a subcontractor with HM Revenue & Customs (HMRC) before you first pay them. Verification is the process of checking with HMRC whether your subcontractor has registered under CIS and what their tax status is.

You’ll need to verify a subcontractor if you haven’t included them on a monthly CIS return in the current tax year, or in one of the two tax years before that. A tax year runs from 6 April in one year to 5 April in the next.

Depending on the system you use for CIS, you can verify a subcontractor by:

calling HMRC’s CIS Helpline on Tel 0845 366 7899 (follow the link below for the helpline opening hours)
using HMRC’s CIS Online service
using suitable commercial CIS software
using Electronic Data Interchange (EDI)

Whichever way you choose, you’ll need to have certain information ready. You’ll need the following details about yourself to hand:

the name of your business or organisation
your unique taxpayer reference (UTR)
your Accounts Office reference
your employer reference

You’ll also need the following information about the subcontractor:

their name, or the name of their business or company
their UTR
the partner’s name if they’re a partnership
their National Insurance number (if you know it) if they’re a sole trader
the partner’s UTR or National Insurance number if they’re a partnership (or, if the partner’s a company, that company’s UTR or company registration number)
their company registration number if they’re a company

Paying Subcontractors and making deduction under CIS

When HMRC verify your subcontractor they will tell you how to pay them. This could be:

gross – with no deductions taken off their payment
net of a deduction at the standard rate – 20 per cent
net of a deduction at the higher rate – 30 per cent

To make a deduction from a subcontractor’s payment, start with the total – gross – amount of the subcontractor’s invoice and then take away:

any VAT they’ve charged
the amount of any Construction Industry Training Board (CITB) levy they’ve paid

Then take away the amount the subcontractor actually paid for each of the following (including VAT if they’re not VAT registered):

materials
consumable stores
fuel used – except for travelling
plant hire
manufacturing or prefabricating materials

Finally, apply either the standard or the higher rate percentage to the amount that’s left to work out how much to deduct.

Paying over deductions to HMRC

The deductions that you take from a subcontractor’s pay will need to be paid over to HMRC. To find out more about how to make payments to HMRC, follow the link below.

CIS Deductions

Deduction statements and monthly returns

As a CIS contractor you are obliged to complete some paperwork whenever you pay subcontractors.

You must give a written statement to every subcontractor from whose pay you are required to make a deduction. You have to do this within 14 days of the end of each tax month. A tax month runs from the sixth day of one month to the fifth day of the next month. You can give a subcontractor a statement each tax month or, if you pay them more often, one for each payment.

Each statement must include:

the name of your business and your employer tax reference
either the date when the tax month in which you made the payment ended, or the date when you made the payment
the subcontractor’s name and UTR
the subcontractor’s verification reference number if the deduction was at the higher rate
the gross amount before you made the deduction but after you’d taken off any VAT, CITB levy, materials costs and so on
the cost of any materials you took off before making the deduction
the amount you deducted

Payment & Deduction Statement Template – HMRC (PDF)

CIS Payment Statement – SAS (Excel2010)

You don’t have to give statements to subcontractors whom you pay gross, but it’s good practice to do so. You could include some of the information that you put on statements of deduction.

Each month you’ll need to send a monthly return to HMRC. This tells HMRC about the payments you’ve made to all your subcontractors – and any deductions you’ve made from them. If you haven’t made any payments, you’ll have to make a ‘nil return’ to let HMRC know.

The quickest and easiest way to submit your return is electronically – using HMRC’s CIS Online service, third party software or EDI.

Record keeping under CIS

HMRC expects contractors to keep certain records. You’ll need to keep details of:

the gross amount of each payment you make to a subcontractor – excluding any VAT
the amount of any deduction you made from a payment before you gave it to the subcontractor
if you made a deduction, the amount of any materials costs – excluding any VAT

You must keep your records for at least three years after the end of the tax year they’re for. If HMRC ask to see them you’ll need to make them available and provide any facilities they need to look at them.

Perhaps you are also a Subcontractor in which case you had better read part 3 also.