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CITB Levy and VAT

My client is a building contractor and uses labour only sub contractors to the extent that they need to pay a CITB Levy each year.

To recover the cost of the Levy, a percentage deduction is made from the payment made to the subbie each month. This is apparently a normal procedure in many construction organisations. In other words the contractor is passing on the cost of the levy to the subbie.

We are about to advise oiur client on the VAT implications and have suggested that where a subbie sends an invoice to the company plus VAT, the VAT element must be paid in full and the percentage deduction retained from the net element. A suggestion has been made that the VAT should be recalculated on the actual amount paid to the subbie but i cannot see this.

Can anyone clarify the method of passing on the levy please.

Stormrider

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By Anonymous
29th Oct 2008 14:34

Thanks
I would like to thank everyone for commenting on this item.

It seems that there is a gap between industry standards and the principles set out in Law?

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By egbell
27th Oct 2008 22:50

Smart contractor!!!
Not only does one contractor I know of deduct CITB levy +VAT,he also deducts insurance+VAT!!!What can the subbie do?He can refuse to work,providing there is sufficient other work elsewhere,or "lump it & like it".The contractor concerned is forever changing his business entity/name & what deductions he makes & is a nightmare.I am glad I am not his accountant.

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By jimeth
27th Oct 2008 14:48

Industry Practice
I cannot claim to be an expert on the legal position here. However, as a software provider to the construction industry (including around two hundred UK contractors and house builders), I can confirm the normal industry practice.

The CITB levy is invariably deducted after VAT (so that the VAT amount is not reduced).

Not all contractors make the deduction from their subcontractors. Some, as suggested by other respondents, try to make the deduction "if they can get away with it" but will stop deducting from any subcontractor who complains loudly enough.

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Value of Sub-Contractor's Supply
Freddy gives a helpful quote from the CIS manual. This underlines that the CITB levy is legally on and paid by the main contractor, see Industrial Training Act 1982 and the payment regs 2008/534.

Customs’ view in Notice 708 para.22.2 does not apply here as the sub-contractor does not agree to a post-contractual change nor get anything out of a reduction. Nor any reason why they should agree to receive less money but still have to make the same value of supplies. So the sub-contractor determines the value of and what it is they suppy for VAT, not the gross paying main contractor.

Of course the main contractor can always take a chance and make an unauthorised deduction. Depends if they feel lucky.

Eamon Mc Nicholas
Tax Barrister

www.EamonMcNicholas.com

[The above is not to be taken nor used as specific advice]

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By Anonymous
22nd Oct 2008 13:33

Whose liability ?
In my opinion the CITB levy liability is that of the customer (main contractor) not the subcontractor.

It therefore follows that the customer (main contractor) is NOT paying the CITB levy on behalf of the contractor - but rather recouping a cost that belongs to the customer from the subcontractor.

My own view is that customers (main contractors) who deduct this CITB levy from their subcontractors are in effect simply obtaining a price reduction (or discount) from their subcontractors equivalent to the CITB levy cost of the customer (main contractor). Were it to be the case that the customers (main contractors) were paying the CITB levy "on behalf of" their subcontractors", then yes we might have two transactions and a contra effect with VAT liable on the higher price and no VAT relief on the reduction for levy.

As the subcontractor is sufferring a reduction / discount in the price for his services (cosmetically laid out as job price less CITB levy) the VAT liability has to be on the reduced price (net of levy deduction) not the cosmetically higher "job price" before deduction of his customer's CITB levy.

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By kabini
22nd Oct 2008 08:54

Contractors and their subbies – who needs them!!!

I agree with the previous posts.

The CITB levy is not subject to VAT and should not be deducted from the gross contract price before applying VAT.

I suspect your clients are confusing HMRC guidelines for calculating the gross amount to be shown on the monthly return with VAT rules. There is an example in the CISR manual which might have caused the confusion.

In this example, the guide says, "where the agreed contract price is £1,000 (plus VAT) and the CITB levy is, say £7, the sum that should be shown on the monthly return as the gross amount of the payment will be £993. That is the agreed contract payment of £1,000, excluding VAT and less a deduction of £7 for the CITB levy."

It isquite clear from this example that the agreed contract price is standard rated whereas the CITB levy is not.

Hope this helps.

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Re-charging CITB Levy
The sub-contractor makes their supply to the main contractor which is subject to VAT. They are not agreeing to reduce their charge by an amount equal to the Construction Industry Training Board (CITB) levy on the main contractor. This is not altered by any “re-charge” of the CITB levy by the main contractor down to the sub-contractor.

The problem is really what the re-charged CITB represents. When initially levied on the main contractor the CITB is a statutory charge, made by Construction Skills in England, based on 0.5% to 1.5% of the wage bill. But as a statutory charge or levy it is not, ordinarily, a supply for VAT purposes.

There are also possible non-VAT problems of whether the main contractor can properly make a re-charge and whether the sub-contractor is also subject to a correct CITB levy directly from Construction Skills (so paying twice).

But for VAT purposes what does the sub-contractor get from the main contractor in return for the re-charged CITB? Nothing. It is just a cost component being passed on.

So, no basis for trying to change or reduce for VAT purposes the sub-contractor’s VAT supply. Query whether the main contractor making a re-charge is making a supply subject to VAT.

Eamon Mc Nicholas
Tax Barrister

www.EamonMcNicholas.com

[The above is not to be taken nor used as specific advice]

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By pawncob
21st Oct 2008 17:49

VAT is going on?
There's no VAT on the levy so how can it affect the VAT on the subbie's account?
The levy is a deduction on the net amount.

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