To ensure the correct tax is deducted contractors must complete a subcontractor verification. We will explain how to complete this process.
Before a payment is made by a contractor they must complete a CIS subcontractor verification. This then povides the correct amount of tax to deduct. The CIS tax rates can be either 30%, 20% or 0%.
In this blog, we will provide a step by step guide on how to verify a subcontractor using the HMRC website, what results you should expect and how often you need to complete the process.
When contractors take on a new subcontractor who they have not used before they must verify them before any payment is made.
They must do this to ensure that the correct CIS tax rate is being deducted from the subcontractor. Only HMRC can provide the CIS tax rate.
Contractors can use the HMRC website but we prefer commercial software. Most payroll programs have a CIS option, which can verify the subcontractor and complete the required filings.
To complete the process you will need to provide HMRC with the following subcontractor details:
1) Name
2) Unique Tax Reference (known as UTR)
3) Companies House Number (Limited Companies) or National Insurance Number (Soletraders or Partnerships)
Tip: Sometimes you can complete the subcontractor verification without a NI number. We would still recommend obtaining this information however it isn’t always essential.
Below are the steps which a contractor needs to complete to verify the subcontractor using the HMRC website:
1) Firstly, you will need to log on to the HMRC website using your login details,
2) Then, on the left hand side of the CIS webpage should be a link ‘add subcontractor’,
3) It will then ask what type of business the subcontractor is i.e Individial, Company, etc,
4) Finally, a new webpage will appear requesting the subcontractors information.
The webpage will look similar to the image below. The image below is where the subcontractor is an individual.
After you complete the above you will then receive the subcontractor verification results.
N.B We recommend that only the smallest contractors use the HMRC website to complete the filings. Commercial software is much simpler and faster to use. As an example we use either Quickbooks or Brightpay depending on the client.
Depending on whether you use the HMRC website or other software, the process will be slightly different. However whichever you do decide to use in all cases HMRC will provide you with 2 pieces of information. They will inform you of the tax to be deducted and a verification number.
The tax you need to deduct will either be:
– 30% deduction as they are not registered as subcontractors
– 20% deduction as they are registered at the standard / net rate
– 0% deduction as they are registered with gross payment status
The verification number is your proof that you have deducted the correct amount of tax. You will be provided with the same verification number if you verify multiple subcontractors at the same time.
The verification number will typically be a V followed by 10 numbers. An example would be V1230122604.
Tip: Typically contractors know what rate HMRC will say to deduct. If a different rate is showing in the verification process we recommend the contractor informs the subcontractor before the payment is made. It could simply be that the incorrect UTR or other information was provided which if this does happen just complete the verification process again. It is up to the subcontractor to contact HMRC if they believe the incorrect CIS tax rate is being deducted. The contractor must deduct whatever rate HMRC say to deduct as part of the subcontractor verification.
Contractors don’t need to complete a subcontractor verification every time they make a payment to the subcontractor.
Typically if the contractor has used the subcontractor in the last 2 years they won’t need to be verified again. Both the HMRC website and the commercial software that we use will warn you if the verification is out of date. Only then would a contractor need to complete the verification.
Should the subcontractor change status from say 20% to 0% tax or vice versa HMRC will notify both the contractor and the subcontractor of the change. HMRC only notify contractors who have an up to date verification.
This is why if a verification is out of date the contractor must verify them again as they won’t be informed of any changes. However if the verification is still valid (in date) then the contractor can continue to pay the subcontractor whatever tax deduction was done previously.
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