How to Register as a Subcontractor

The HMRC collects tax from subcontractors through the CIS. This is the system they use to help prevent an overload of tax evasion within the industry. This is applicable for all levels of contractors, subcontractors, sole proprietors and companies who are involved in construction activity.

Also, if you’re a property developer that spends more than one million or more in a three-year period on renovations or construction, you also must apply for and comply with CIS rules.

If you are a contractor or subcontractor working within the CIS, you need to apply for a UTR number (unique taxpayer reference) number. This will allow you to be identified as an individual taxpayer within the system, and will make paying your taxes much less of a headache.

Registering with the CIS may be confusing when initially looking at all their protocols, but is a relatively simple task once you have all the information you need. We’re going to walk you through and show you how to best register with the CIS as a subcontractor.

How to register

As a subcontractor who usually carries out work for a company as part of a larger project, under the CIS system, a contractor will subtract a certain amount of payment that is supposed to be made to the subcontractor, and will pass it on to the HMRC himself.

The subcontractor does not technically have to register under this scheme, but if they don’t the deductions from their payment will be much higher.

As a subcontractor trying to register for the CIS, you need the following pieces of information:

• Legal business name or trading name
• National insurance number
• Unique taxpayer reference (UTR) number
• Value added tax (VAT) registration number

To register, a subcontractor will then notify the HMRC, and they will require the business name along with your UTR code and National Insurance number. To register under CIS, that is in addition to your basic registration as a self-employed individual.

When you contact HMRC to register as self-employed, make sure to notify them that you wish you register as a CIS subcontractor. You will have a UTR issued to you when you first set up as self-employed to complete a tax return.

It is then the contractor’s duty to make sure you get paid. Before you start any work as a subcontractor, the contractor must confirm that your service status is labelled as self-employed, and if you have not been included in the contractor’s monthly CIS tax return, then they must authentic the details with the HMRC.

Once registered, your tax will be deducted from payments at one of three rates, depending on if you registered or not with the CIS, and if you are eligible for gross payments (explained later). If you are not registered with the CIS, you would incur a steep 30% tax rate, excluding VAT and material costs. If you are registered with the CIS, you would see a 20% tax deduction. If you are registered with the CIS, and eligible to receive gross payments, then no deductions will be made to your income.

As a subcontractor, you’re eligible to receive payments without the deduction of tax if you pass three eligibility tests:

Business test: If the construction work you are sourced to do is done in the United Kingdom, and the money runs through a bank account.

Turnover test: If your annual turnover is 30,000 or more.

Compliance test: If you have no outstanding tax returns due.

Following these three tests, you may be considered eligible for gross payments, and the contractor who sources your work will not have to make deductions from your pay to the CIS.

Subcontractor vs employee

There are a few differences between employees and subcontractors, and sometimes the line is hard to draw. If the line gets drawn too close, and the HMRC starts to see the subcontractors hired as employees, then the fees paid to subcontractors could be net salary, and would seriously inflate the tax the contractor would have to pay at the end of the year.

What is a subcontractor

A subcontractor is hired by a contractor or business, to bring in skills that are needed for a job that the company currently lacks in, on a contract. A subcontractor usually has a special set of skills, and works within a vague outline, but will use his knowledge to complete the job and dictate how the work goes.

A subcontractor also usually has most the tools needed at his disposal, and they are not provided fully by the company. As a subcontractor, you work based on a guideline, and not set rules. If a company hired you for contract work to wheelbarrow concrete back and forth using their tools all day, you would be considered an employee, and not a subcontractor.

Employers are not required to pay subcontractors social security and Medicare taxes, as they are required to pay their own self-employment taxes.

What is an employee

An employee is defined by the behaviors and extent of control they are allowed at work. An employee is usually hired on an hourly wage or salary, for an extended amount of time, and are given more rules on how to perform their job.

They are usually required to be given all the necessary tools to succeed at their job, and are usually ordered by a superior on how to perform their job. Employers pay their social security and Medicare taxes, and it’s also reasonable for the employer to pay the employee for other expenses incurred on the job, such as mileage, food expenses, and other deeds.

Conclusion

As a subcontractor, registering with the CIS can save you a lot of money in taxes every year. Make sure you register under the HMRC as a self-employed subcontractor, and to also apply as a CIS subcontractor, as these are two separate registrations.