Construction industry - tax deduction legislation

click here for information on tax certificates

A brief history  

- The Finance Act 1971 introduced a system of providing for deduction of tax at source on payments within the industry unless the contractor held an exemption certificate.

- Finance (No.2) Act 1975 substantially redrafted the provisions. 

- Further changes were made to the legislation from 1 August 1999.

How the scheme operates

- The deduction at source scheme applies to payments made by 'contractors' to 'subcontractors' for work involving construction, and also work involving installation, repairs, fitting, decorating and demolition.

The terms 'contractor' and 'subcontractor' go very much wider than the meanings they normally have in the industry.  The term 'contractor' includes:

• persons whose trading activities include construction operations
• property developers
• government departments
• local authorities and housing corporations
• certain bodies identified by the Inland Revenue
• any business if more than £1million is spent in a year on construction operations.

The scheme does not include private householders having work done on their own premises.

A 'subcontractor' is any business which has agreed to carry out construction operations for another business (the contractor).

Payments by contractors to subcontractors can only be made in one of three ways:

a)    gross, where the subcontractor holds a tax deduction certificate, or

b)    under deduction of tax, where the subcontractor holds a registration card, or

c)    under PAYE

Vouchers must be issued by the contractor in cases (a) and (b), remittances of tax made monthly (or quarterly) to the Inland Revenue Accounts Office, and annual returns completed after the end of the tax year.

For further information on Tax Certificates, please click here.