Under the Construction Industry Scheme (CIS) if you use subcontractors who don’t have Gross Status the contractor has to make a deduction of 20% or 30% and pay it to HMRC.
In the CIS340 guidance, the deduction is applied as follows
There are 2 steps that contractors must follow.
Step 1: Work out the gross amount from which a deduction will be made by excluding VAT charged by the subcontractor if the subcontractor is registered for VAT, read the examples in CIS 340 Appendix D.
The contractor will need to keep a record of the gross payment amounts so that they can enter these on their monthly returns.
Step 2: Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor is not registered for VAT:
- materials
- consumable stores
- fuel (except fuel for travelling)
- plant hire
- the cost of manufacture or prefabrication of materials
The bit that is left after following the steps above is the Labour to which tax deduction of 20% or 30% is applied.
What is the Labour if the subcontractor has its own subcontractors?
The subcontractor needs to show the amount of labour inclusive of the subcontractors they have used!
They are charging the main contractor for all labour costs even if some of their subcontractors may be gross status.
