The contractor has to contact HMRC to find if he should pay a subcontractor gross or net. You don’t have to verify all the subcontractors all the time. You would normally verify only the new ones. The verification procedure will establish which of the following payment options apply:
- gross payment (no deductions made)
- a standard rate deduction of 20%
- a deduction made at the higher rate of 30%, if the subcontractor has not registered for CIS with HMRC. Or cannot provide accurate details to the contractor and HMRC cannot verify them.
HMRC will give the contractor a verification number for the subcontractors which will be matched with HMRC’s own computer. This number will be the same for each subcontractor verified at any particular time. Subcontractors who cannot be verified will have special suffixes for the numbers. The numbers are also shown on the payslips issued to the subcontractors and on contractors’ monthly returns.
These numbers are important and contractors have to ensure that they have a good system in place for obtaining and retaining them. It is crucially important to give precise details to HMRC. As the higher rate deduction (30%) will have to be made, if their computer does not recognise the subcontractor. Mandatory online verification of subcontractors will be introduced from 6 April 2017.
The contractor will not have to verify the subcontractor if they have already included them on any monthly return in the two previous tax years.
All subcontractors have to be provided with at least a monthly ‘payslip’. It should show the total amount of the payments and how much tax, if any, has the contractor deducted from those payments. Payslips can have different styles, but certain specific information has to be provided including the:
- contractor’s name and their employer tax reference
- subcontractor’s name, unique tax reference or specific subcontractor reference
- tax month to which the payment relates
- the gross amount of the payment
- cost of any materials which have reduced the gross payment
- amount of any tax deductions made and
- verification number where deduction has been made at the higher rate of 30%.
If contractors include such payments as part of their normal payroll system, it has to be clear that they are classed as self-employed.
If you need help with the payroll of the subcontractors, or for anything else in relation to CIS scheme, please contact us at Adiva Accountants in London and we will be happy to assist you.