Contractor vs subcontractor: the difference under CIS

What is the difference between a contractor and a subcontractor?

In everyday use, the contractor is hired by the client and the subcontractor is hired by the contractor to do part of the job. CIS uses both words more widely than that. HMRC’s CIS guide says: Under the scheme, the term ‘contractor’ has a special meaning that is much wider than it normally has in the construction industry.

For CIS, it comes down to which way the money goes:

• Contractor: A contractor is a business or other concern that pays subcontractors for construction work.
• Subcontractor: A subcontractor is a business that carries out construction work for a contractor.

Source: HMRC’s CIS340 guide, section 1.2.

So a contractor is not always a building firm. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’. A business that does no building work at all becomes a contractor once it spends more than £3 million on construction in any 12 months. HMRC calls that a deemed contractor. We explain the test in our deemed contractor guide.

Homeowners are the exception. Private householders are not counted as contractors so are not covered by the scheme.

Can you be a contractor and a subcontractor at the same time?

Yes, and it is common. CIS340 says: Many businesses pay other businesses for construction work, but are themselves paid by other businesses too.

Each payment follows its own set of rules. When they’re working as a contractor, they must follow the rules for contractors and when they’re working as a subcontractor, they must follow the rules for subcontractors.

You also register on both sides. GOV.UK says: If you’re a subcontractor and a CIS contractor (you pay subcontractors to do construction work), you’ll need to register for CIS as both.

Which am I? Three common setups

These use labour only, with VAT and materials left aside, and assume everyone is registered for CIS unless it says otherwise.

A builder who pays a plasterer

A builder doing an extension for a homeowner pays a self-employed plasterer £1,200 for labour. The homeowner is outside CIS, but the builder is the contractor for the payment to the plasterer.

• Plasterer registered: the builder deducts £240 (20%) and pays £960.
• Plasterer not registered: the builder deducts £360 (30%) and pays £840.

If this is the first time the builder has paid anyone for construction work, they need to register as a contractor first. You must register for CIS before you take on your first subcontractor.

A sole trader working for a main contractor

A self-employed electrician does £2,000 of labour for a main contractor and pays nobody else. They are the subcontractor. The main contractor deducts £400 and pays them £1,600.

The £400 is not lost. It goes to HMRC towards the electrician’s own tax, and at the end of the year HMRC will work out how much tax you owe and take off any deductions taken by contractors.

A firm that is both

A groundworks company does £10,000 of labour for a main contractor and pays two self-employed labourers £1,500 each to help.

• As a subcontractor: the main contractor deducts £2,000 and pays the company £8,000.
• As a contractor: the company deducts £300 from each labourer, pays them £1,200 each, and owes HMRC £600.

Because it is a limited company, it can use the £2,000 taken off it against what it owes HMRC each month. CIS340 says Companies that have deductions taken from their income as subcontractors should set-off these deductions against the amounts payable monthly or quarterly for PAYE, National Insurance contributions and Student Loan repayments due from their employees and CIS deductions from their subcontractors.

A gang leader works the same way. They are the subcontractor to whoever pays the gang, and if they pay the gang members themselves, Any deductions from payments to the members of the gang are the responsibility of the gang leader.

Work out a deduction with your own numbers

What does a contractor have to do under CIS?

Most of the work falls on the contractor. On every payment to a subcontractor, you:

1. Register as a contractor before the first payment. How to register as a CIS contractor
2. Verify the subcontractor with HMRC, which tells you the rate to use. How to verify a subcontractor
3. Deduct from the labour at 20%, 30% or 0%, as HMRC told you.
4. Give them a statement of what you paid and deducted, within 14 days of the tax month ending.
5. File your CIS return by the 19th and pay HMRC by the 22nd.

Source: GOV.UK, what you must do as a CIS contractor: Before you can pay a new subcontractor, you’ll need to ‘verify’ them; you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month; Send your monthly returns to HMRC by the 19th of every month following the last tax month. Pay HMRC every month by the 22nd (or the 19th if you’re paying by post).

How CIS works, step by step

What does a subcontractor have to do under CIS?

Register, keep your statements and claim the deductions back. Registering is optional, but Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered. That is 30% instead of 20%.

• How to register as a CIS subcontractor
• Payment and deduction statements
• Claiming your CIS deductions back

Am I self-employed if I am a subcontractor?

Not just because you are paid through CIS. The scheme only covers people who are self-employed on that job: the scheme applies to workers who are self-employed under the terms of the contract, and who are not employees subject to Pay As You Earn (PAYE). You do not need to register for CIS if you’re an employee.

CIS340 puts the question on the contractor: it’s for the contractor to consider the individual’s employment status when the subcontractor is first engaged. It also says The fact that the subcontractor has worked in a self-employed capacity before is irrelevant in deciding on their employment status.

Getting it wrong costs the contractor. You may get a penalty if they should be an employee instead. And on the monthly return, You could get a penalty of up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return.

We do not advise on employment status. HMRC has its own free check, called CEST: The CEST tool gives HMRC’s view of a worker’s employment status, based on the information you provide. HMRC will stand by all results given by the tool, as long as the information you give remains accurate and is in accordance with our guidance. Check employment status for tax on GOV.UK