Sub-contractor

A sub-contractor is a business or self-employed individual engaged by a contractor to carry out a defined part of the work on a job, under its own commercial terms rather than through payroll. They price the work, supply their own tools and insurance, control how the work is carried out within the agreed program, and invoice for it on completion. In UK construction that arrangement carries tax obligations that fall on the contractor paying them, not on the sub-contractor.

Sub-contractor or employee: the status test

Status is a question of fact rather than of what the contract is called. HMRC's position is that a person is self-employed if they run their business for themselves and take responsibility for its success or failure, and that individuals and the businesses paying them may have to pay unpaid tax and penalties if the status is wrong. The CIS guidance is blunter still: a contractor must check whether it should be employing the person instead of subcontracting the work, and may be penalized if it should.

CIS deductions

Under the Construction Industry Scheme, the contractor deducts money from the sub-contractor's payment and pays it to HM Revenue and Customs as an advance payment towards that sub-contractor's tax and National Insurance. HMRC sets the rate when the sub-contractor is verified: 20% for registered sub-contractors, 30% for unregistered ones, and 0% for those with gross payment status. Registration as a contractor is required of any business paying sub-contractors for construction work, and also of a business that does no construction work itself but has spent more than £3 million on construction in the 12 months since its first payment.

The deduction is not applied to the whole invoice. Materials, plant hire, fuel and consumable stores the sub-contractor paid for come out first:

CIS deduction = (gross invoice excluding VAT - materials and other allowable costs) x the rate HMRC gives you

1. A sub-contractor invoices £2,600 excluding VAT, of which £600 is materials they bought and can evidence.
2. Take the materials out: £2,600 - £600 = £2,000.
3. Apply the registered rate: £2,000 x 20% = £400.
4. Pay the sub-contractor £2,600 - £400 = £2,200, and £400 to HMRC.
5. On the same invoice from an unregistered sub-contractor the rate is 30%: £2,000 x 30% = £600, and the payment is £2,000.

Where deductions are made, the contractor must give the sub-contractor a payment and deduction statement within 14 days of the end of each tax month. For the tax month running 6 May to 5 June, that means by 19 June. Some work is outside the scheme entirely, including architecture and surveying, scaffolding hire with no labor, carpet fitting, delivering materials, and running a site canteen.

Keeping sub-contractor cost on the job

The commercial half is simpler than the tax half and gets skipped more often. Book the work in writing before it starts, stating scope, dates, the agreed rate or fixed price and site access. Raise the order against the job so the cost lands in the job margin rather than in overhead. Get completion signed off before the invoice is approved, and check the invoice against both. Where the sub-contract runs under a construction contract, the sub-contractor will usually claim through a payment application rather than a plain invoice, and retention may be held from each payment.

Zigaflow issues works orders against the job, so the instruction to the sub-contractor, the cost committed and the sign-off sit on the same record.