CIS or PAYE: A guide to the construction payment process

A guide for the construction payment process

Pay As You Earn (PAYE) is the way employees pay income tax and National Insurance contributions as part of their employer’s payroll. Payments are calculated against earnings before being deducted from pay, typically on a weekly or monthly basis.

What is the CIS?

The Construction Industry Scheme (CIS) is where contractors deduct tax and National Insurance contributions from a self employed subcontractors payments. This is set at a rate of 20% which the contractor passes on to HMRC on behalf of the subcontractor. 

All contractors must register for the CIS before beginning any work. HMRC defines contractors as someone who:

• Pays subcontractors for construction work
• Has a business that doesn’t do construction work but has spent more than £3 million on construction in the last 12 months since first payment was made

Subcontractors do not need to register for the CIS but deductions will be taken at a higher rate of 30% if they don’t register. HMRC defines a subcontractor as someone who does work for a contractor. 

Read more about the CIS on on our guide here.

Subcontractors can only be paid via PAYE if they are an employee. Employees are defined as having one or more of the following:

• Has an employer, manager or supervisor with control over their workload and how their work should be done 
• Required to work regularly unless they are on leave 
• Required to do a minimum number of hours and expect to be paid for time worked 

• Work must be consistently available – meaning the employer is required to provide work for the employee and the employee is required to perform work for the employer 
• Employed to do the work themselves (provide a personal service) and only have a limited right to send someone else to do the work
• Does not provide or use their own equipment 

Read more about the different employment statuses on our guide here.

Alternatively, if a subcontractor is self employed and completes construction work for a contractor, they can register for the CIS. However, the subcontractor must be working in one of the following areas, as listed by HMRC:

• preparing a site – for example, laying foundations and providing access works
• demolition and dismantling
• building work
• alterations, repairs and decorating
• installing systems for heating, lighting, power, water and ventilation
• cleaning the inside of buildings after construction work

There are some exceptions and subcontractors working in the following areas cannot register for the CIS:

• architecture and surveying
• scaffolding hire (with no labour)
• carpet fitting
• making materials used in construction including plant and machinery
• delivering materials
• work on construction sites that’s clearly not construction – for example, running a canteen or site facilities

Can a subcontractor change between PAYE and CIS?

A subcontractor is able to change between PAYE and the CIS at any point during the financial year. However, if leaving the CIS to become an employee, a self assessment tax return must still be submitted by 31 January for the part of the year the subcontractor was registered for the CIS. 

To change between PAYE and CIS, the subcontractor must contact HMRC to get their records updated. 

Contractors must first check with HMRC whether a subcontractor is registered for the CIS before they can make a payment to them. HMRC will tell the contractor the rate of deduction to apply to the payment, or whether the payment can be made without deduction. 

If a deduction to payment needs to be made, the contractor must first calculate this using the information provided by HMRC then make the deduction. Details of the payment, materials and deduction need to be recorded, then a net payment made to the subcontractor along with a statement of deduction. 

Contractors must also send HMRC a monthly return of all payments they have made within the CIS scheme (including if no payments have been made). The return includes information such as: 

• Details of subcontractors
• Details of payments made and any deductions
• Declarations that employment status of all subcontractors has been considered
• Declaration that all subcontractors have been verified if required

As a Commercial Contractor, Indigo manages the direct link between your business and your subcontractors. Indigo engages with subcontractors directly, including verifying them with HMRC and taking full responsibility for the subcontractors’ self-employed status. 

Indigo provides a unique online platform, MyIndigo. This allows contractors to manage subcontractors and payments in one central location, in a safe and secure way. Benefits of MyIndigo include: 

• Make only one payment to one UTR number each pay run (Indigo)
• A weekly subcontractor payment certificate and year-end statements
• Text alerts for subcontractors prior to payday to inform them of their earnings

Read more about Indigo’s Contract solution here.

Please get in touch if this is something you think Indigo can help you with.