Managing payroll in the UK construction industry presents unique challenges due to specific tax regulations and the diverse nature of the workforce. From the Construction Industry Scheme (CIS) to differentiating between employees and subcontractors, staying compliant is crucial to avoid
significant penalties from HM Revenue and Customs (HMRC). This guide provides a comprehensive overview of your responsibilities.
The first critical step is to correctly determine the employment status of your workers. The rules and
payment processes differ significantly for direct employees versus self-employed subcontractors.
Employees work under a contract of employment. You, as the employer, dictate their hours, provide tools, and they are entitled to statutory rights like holiday pay, sick pay, and pension contributions.
They are paid via the Pay As You Earn (PAYE) system.
Subcontractors are typically self-employed or operate through their own limited company. They have more control over how and when they work, often provide their own equipment, and are
responsible for their own tax and National Insurance. They are usually paid under the Construction Industry Scheme (CIS).
IR35 (Off-Payroll Working Rules): Be cautious of the IR35 rules, which are designed to combat disguised employment. If a subcontractor works in a manner that reflects employment (e.g., they are managed like an employee and have no right to substitute another worker), they may be
deemed an employee for tax purposes. For medium and large businesses, the responsibility for determining IR35 status lies with the client (the contractor). For more on IR35 in construction, see JMK Group UK’s IR35 guide.
CIS is a tax deduction scheme that applies to payments made from contractors to subcontractors for construction work. It is not an alternative to determining employment status; it applies specifically
to payments to genuine subcontractors.
Key Features of CIS:
Who Must Register?
Contractors: You must register with HMRC as a contractor if you pay subcontractors for construction work or if your business has spent more than £3 million on construction in the past 12 months.
Subcontractors: While not mandatory, it is highly advisable for subcontractors to register.
How it Works:
Verification: Before paying a subcontractor, the contractor must verify them with HMRC.
Deductions: Based on the subcontractor’s status, the contractor deducts tax from their payments and pays it to HMRC.
Registered Subcontractors: A 20% deduction is made.
Unregistered Subcontractors: A higher 30% deduction is made.
Gross Payment Status: Some subcontractors with a good tax compliance history can apply for ‘gross payment status’, meaning no deductions are made by the contractor.
CIS Returns: Contractors must file a monthly CIS return with HMRC, detailing all payments made to subcontractors.
What’s Covered?
Most construction work falls under CIS, including site preparation, building, repairs, demolition, and decorating. Some professional services like architecture and surveying are exempt.
For more, see the CITB’s CIS overview.
You must provide all employees and workers with an itemised payslip on or before their payday. This
can be a physical or electronic document.
What a Payslip Must Show:
VAT Reverse Charge: For certain construction services, the responsibility for paying VAT to HMRC shifts from the supplier (subcontractor) to the customer (contractor). This is known as the domestic reverse charge and is designed to combat fraud.
Apprentices: Apprentices have specific minimum wage rates that differ from the standard National Minimum Wage. Ensure you are paying the correct rate based on their age and apprenticeship year.
Record Keeping: You must keep detailed payroll records for at least three years from the end of the tax year they relate to. This includes all payments, deductions, CIS returns, and employee information.
Disclaimer: This guide provides a general overview of payroll management in the UK construction industry. Tax and employment laws are complex and subject to change. It is essential to use compliant payroll software and consider seeking professional advice from an accountant or payroll specialist to ensure you meet all your legal obligations. For tailored support, contact JMK Group UK.
Since 2002, JMK have been compliantly consolidating back-office, accountancy and payroll functions.
We have evolved to provide a range of expert services; such as Funding, becoming a leading provider to the contracting industry.
We know every agency is different in some shape or form, even if only by a little, but important bit. Combining our knowledge and experience of multiple sectors enables JMK to support you all from recruiters and payroll, through to finance, compliance and management.
With JMK as your trusted partner, even the smallest team can process the largest payroll, regardless of payroll type.
Have a look at the wide range of services our Funding can provide to you and your business, it is far more than just payroll and finance.
