You have to tell HM Revenue & Customs (HMRC) each month about all the payments you’ve made to your subcontractors within the scheme. You do this by making a monthly return.
When any subcontractors work for you, you must decide whether to treat them as an employee in which case you will operate a PAYE scheme whereby tax and National Insurance Contributions (NICs) are to be deducted from the payments made to them, or whether to treat them as self-employed.
If and when you verify your subcontractors as self-employed, the payments you make to them as the contractor will be dealt with through varying types of deductions.
How does it work?
Payments under CIS – gross or under deduction
Under CIS, there are two ways of paying subcontractors – gross or under deduction.
If your subcontractor is registered for gross payment, the contractor pays in full without any deduction. So the subcontractor will need to pay tax and National Insurance contributions (NICs) on this amount later through their tax return.
If they are registered for payment under deduction, you would take off an amount (currently 20 per cent) before you pay them and you must pay this over to HMRC. They’ll still need to pay tax and NICs on their payments later through a tax return, but HMRC will set any deductions that have already been made from your payments against this bill.
What happens if i make a late return?
Penalties for late CIS returns
If you send HMRC a monthly return late – whatever the reason – you’ll automatically get a penalty.
Penalties for missing the return deadline.
| Length of delay | Penalty you will have to pay |
|---|---|
| 1 day late | A fixed penalty of £100. This applies even if your return has no subcontractors on it – a nil return. |
| 2 months late | A fixed penalty of £200. This applies even if your return has no subcontractors on it – a nil return. |
| 6 months late | £300 or 5% of the CIS deductions shown on the return, whichever is the higher. This is as well as the penalties above. |
| 12 months late | £300 or 5% of the CIS deductions shown on the return, whichever is the higher. In serious cases you may be asked to pay up to £3,000 or 100% of the CIS deductions shown on the return, whichever is the higher. These are as well as the penalties above. |
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