What does being a Subcontractor mean?

Subcontractors are normally hired by a main contractor to perform a specific task as part of the overall project. Sub-contractors are generally builders, plumbers or tradesmen in the construction industry. Subcontractors may have no fixed date, arrangements or contracts which may be beneficial to them if they wish to move from one job to another.

The subcontractor is normally paid for services provided to the project by the main general contractor. The contractor will deduct money from a subcontractor’s payments and pass these on to HMRC on behalf of the sub contractor. These deductions are treated as advance payments on behalf of the subcontractor for Income tax and National Insurance. When the subcontractor is preparing their accounts for the tax year from 6 April to the following 5 April the subcontractor will enter the total tax deducted by any contractors on their tax return which will be offset against their tax liability for the year, which may result in a tax refund if they have overpaid tax.

You need to contact HMRC to register and you will need your Unique Tax Reference Number (UTR), if you do not have one, you will firstly have to register as self-employed with HMRC if you have not already done so.

Once you are registered the main contractor will verify your details with HMRC and they will know from this which tax deduction to use.

The deduction rates are 20% – which most subcontractors will have deductions made at;
30% – deduction at this rate could mean that you haven’t provided your contractor with a UTR number or that HMRC could not find you on their list, if this is the case you would need to contact HMRC;
Gross Payment – this means that no tax is deducted, in order to qualify for “gross status” there are a number of tests which must be met.

Benefits to Contractors

By hiring sub-contractors to do the work, main contractors can reduce costs and mitigate risks instead of relying on hiring employees. Most business owners want to find ways to lower their costs, in reality employee costs are usually the highest cost associated with running a business. It is cheaper to outsource work rather than hiring an employee as you can avoid taxes such as employers NIC, the need to pay a full time salary and holiday pay.

Michelle Phillips