CIS deductions for sole traders

CIS deductions for sole traders

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A company is able to offset tax deducted from its CIS income against its PAYE liabilities, whereas a sole trader must wait until completion of SA return (or perhaps claim an in-year repayment if accounts already drawn up). This seems inherently unfair - what is the rationale behind the disparity?
David Lochhead

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By AnonymousUser
03rd May 2007 11:54

Reply to David Lochhead

This is another loophole that the chancellor will have to close, is it?

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By AnonymousUser
03rd May 2007 14:04

Reply to Phil
:)

And to Mark -

a very well-reasoned response, thank you. And yes, if you're right, it does leave partnerships as potentially the worst off.

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By AnonymousUser
02nd May 2007 16:48

Exactly what I thought, Phil
"Now that we've upped the tax rate for small companies, how can we stop people disincorporating purely for tax reasons?"

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By User deleted
02nd May 2007 18:29

is it not the other way round ?
If a limited company year end is 30 April 2005 say, the CIS deductions in April 2005 have to go on the 2005-06 P35. Assuming there is only one employee, on a small salary (and receiving dividends) a large rebate is due.

HMRC didnt always get round to making the rebate until September 2006, and we were still getting some in December 2006 after many letters and phone calls. That is a full 20 months after the tax was deducted.

Furthermore, corporation tax for the year ended 30 April 2005 is due on 31 January 2006.

Therefore, companies must pay the tax twice, with HMRC holding onto it for anything upto one year.

I never understood why they introduced the CIS offset against the PAYE payments. Surely it is ludicrous. It should have been offset against corporation tax.

Or does somebody know how to delay the payment of corporation tax, or get the P35 refund quicker ?

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By AnonymousUser
02nd May 2007 19:47

Carolyn...
Can you point me to the exact authority that allows a sole trader to offset deductions against its PAYE liabilities?

FA2004 s.62 makes a clear distinction between unincorporated traders and companies, only the latter seemingly able to offset the liabilities (62(3)).

This is echoed at 4.34 of CIS340, which talks only about companies. (Unless it is the 'English' definition of a company that is a generic term for any business form!)

The Revenue manuals also deal with CTSA and SA traders separately - with the latter they refer only to the ability of a sole trader to claim an in-year repayment based on his income tax/Class 4 liability. I can find no mention of PAYE offset.

And from form CIS132:

"Only companies are affected by this arrangement. It is not available to individual subcontractors or partnerships"

And, finally, Simon's guidance is in accordance with the above.

What have I missed?

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By User deleted
03rd May 2007 09:02

Agree

I thought that all contractors could do it, and ended up with egg on my face after recommending it to a partnership last year, only for them to ring the Revenue and to be told that they couldn't.

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By User deleted
03rd May 2007 13:34

Maybe to do with IR35
I seem to recall that the CIS25 offset against PAYE/NIC/CIS25 tax deduction liabilities for Ltd Co's started after IR35 rules came in.

I think the CIS25 offset against PAYE/NIC liabilities was to prevent IR35 affected companies becoming insolvent - the scenario otherwise prevailing would be high PAYE/NIC payments to HMRC on deemed remuneration, plus 18% deduction off income at source, and (in my experience) no profits for CT purposes, so the new arrangements for Ltd Co's to offset the tax deducted off their CIS income could have been a cashflow "life saver" for any IR35 affected CIS companies.

If my above comments reflect the correct reasoning for the different CIS25 tax offset arrangements, then it seems fair, as a sole trader cannot be liable to the IR35 rules and as such would not suffer a double tax deduction at around the time of earning the income, like a Ltd Co could.

In any case, if we are looking at sole traders with no employees or subcontractors claiming actual expenses incurred (as opposed to some optimistic estimates of expenses) there's often little or no tax repayment due to them - especially after Class 4 NIC was increased some years ago when Class 2 NIC rates were reduced.

This leaves partnerships as unfairly treated as I believe that they CAN be subject to IR35, but the replies to this query state no CIS25 offset against PAYE/NIC liabilities for partnerships.

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