There are special tax rules governing the Construction Industry in the UK.

Basically, a Construction Industry contractor in the UK must deduct 18% tax from the labour content of payments to sub-contractors who are involved in construction operations. The contractor must then pay the deduction over to the tax authorities. The sub-contractor receives a voucher showing the amount of tax deducted. This tax credit is then used to satisfy any Income Tax or Corporation Tax liability due to the tax authorities. This can cause significant cash flow problems for sub-contractors.

It may be possible for a sub-contractor to apply to the tax authorities for a certificate. This certificate entitles the sub-contractor to be paid gross (without tax deductions) by the main contractor.

To obtain such a certificate the sub-contractor's tax affairs must have been kept in order during the recent past. In addition, the sub-contractor must be able to pass one of two turnover tests.

The three year test. The basic rule is that the sub-contractor must have had a turnover (after deducting the cost of materials) of £30,000 each year during three of the last four years.

The six month test. The sub-contractor must have had a turnover of at least £21,000 during a period of six consecutive tax months.

A new business will thus not be able to obtain a certificate entitling gross payment until its turnover has reached a total of £21,000 during six consecutive months.

© Majors, Chartered Accountants, 2000;  Updated 28 September 2000;  Reviewed 25 April 2002