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CIS Investigation

CIS Investigation

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I have a client who is being investigated for Subcontractor costs claimed 2 years ago and the potential to go back a couple of years as well.                                                                                Are there any circumstances where he would not have to operate a CIS deduction scheme and not deduct their tax at source or should he always have done this as soon as he paid a subcontractor.                                 Most of the payments are all around about £300-£400 with the exception of 1 for £2,200.00?                       I have something in my mind that if they are under £1000.00 he doesn't need to operate this scheme??         Thanks

Martin

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By Roland195
11th Sep 2013 11:33

Oh dear

Assuming your client  falls within the construction industry, then there are no reasons short of gross payment certificates why tax should not have been deducted. You need to start some pre-emptive damage limitation by identifying the payments, splitting into labour & materials then trying to obtain as much information but preferably NI/UTR numbers so you can trace the subbies which may help mitigate the penalties and tax assessed.

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Euan's picture
By Euan MacLennan
11th Sep 2013 11:44

Small payments

You are probably thinking of the exemption for Small Payments set out at para. 2.19 of the CIS340 Guide:

"2.19 Small payments
We can authorise deemed contractors not to apply the scheme to small contracts for construction operations amounting to less than £1,000, excluding the cost of materials. (This arrangement does not apply to mainstream contractors.)"

but this applies only to deemed contractors - businesses and public bodies doing a lot of construction work on their own properties.  If your client is an ordinary "mainstream" contractor using sub-contractors to do construction work, he should have been registered as a CIS contractor and should have deducted CIS tax from the labour element of his payments to the sub-contractors.

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By Wilts
11th Sep 2013 12:05

Hi Roland/Euan and thanks that does sound familiar?

They have at the moment asked for copies of the relevant invoices and stated they notice he isn't operating a CIS scheme at the moment but you can feel the direction it's going in.

My client is a plumber and doesn't do any work as a subcontractor himself but ahs used acouple of sub contracators and the ones involved are a tiler and guy just to clear the area and dispose of the rubbish, about £7k in total for 11-12.

Do you suggest its worth registering for CIS scheme but that then may seem as a sign of acceptance that he has operated wrongly?

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Euan's picture
By Euan MacLennan
11th Sep 2013 12:19

CIS registration

If your client intends to use the sub-contractors in future, rather than them billing the customer direct, he must register as a CIS contractor and start deducting and paying over CIS tax.  We know, you know and HMRC suspect that he should have been registered from at least 2011/12, so there is nothing to be gained by any delay.  He will just have to grin and bear the £1,400 (or even £2,100 tax) that HMRC will probably demand from him for 2011/12, unless the sub-contractors have accounted for the tax under their own self-assessments.

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Replying to johnt27:
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By Wilts
11th Sep 2013 13:00

Ah now that's the point I guess... did they declare the income themselves and even if they did I fear he may still be fined although the whole scheme is just so open ended to interpretation and would these be sub contractors even if 1 payment was made through the year would the scheme still need to be operated.. I guess it would but still seems excessive?

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By DMGbus
12th Sep 2013 08:56

Check that the work is within the scope of CIS

It is worth checking that the subcontractors' work is within the scope of the CIS.

 

It might not be.

 

For further information see CIS348.

 

In the context of heating systems the installation is certainly caught but if the work were to be "manufacture, delivery, repair or maintenance of these items" then they might be outside the CIS.

 

Specifically outside the scheme are certain other things (installation of security / telecommuncation systems as examples).  Again CIS348 is helpful here.

 

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By jimeth
13th Sep 2013 11:59

Even a single payment can be in scope of CIS

For any working in construction (rather than a deemed contractor who is having work done on their own properties) then even a single payment to a subcontractor (however small) means they need to operate CIS (assuming the work is in the scope of the scheme).

This catches a lot of small traders out.  The best advice to them if they do not regularly need to use subcontractors is to get the client to pay the subcontractor direct.  That way it is not their problem.  Otherwise they need to register for CIS and then remember to make Nil returns each month if they have not made any subcontract payments in a month. This ends up being quite onerous administratively if the need to have other trades assisting is only occasional.

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By Hollyhurst
13th Sep 2013 12:06

Sub contractor

Whether there is a need to deduct may depend ion the work carried out. Can you describe the work that was carried out then check to see if it is then it is covered by CIS rules.

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By hiu612
13th Sep 2013 12:07

PAYE regulations

The declaration of income by the sub-contractors is key. The PAYE regulations allow for offsetting of the contractor's liability to the extent that the sub-contractor has correctly returned the income in question to HMRC as part of their tax returns, and has paid the tax accordingly. As already suggested, you'll need to identify them and obtain from them some meaningful information to present to HMRC in demonstration that this is the case. Then all you have to worry about is the penalties that HMRC will no doubt seek for your cilent making a seemingly innocent mistake.

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By hiu612
13th Sep 2013 12:07

PAYE regulations

The declaration of income by the sub-contractors is key. The PAYE regulations allow for offsetting of the contractor's liability to the extent that the sub-contractor has correctly returned the income in question to HMRC as part of their tax returns, and has paid the tax accordingly. As already suggested, you'll need to identify them and obtain from them some meaningful information to present to HMRC in demonstration that this is the case. Then all you have to worry about is the penalties that HMRC will no doubt seek for your cilent making a seemingly innocent mistake.

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By martin.jackson
13th Sep 2013 12:23

PAYE Regulations

Actually, it's the CIS regulations to which you refer.

Specifically Condition B in reg 9(4):

9(1)  This regulation applies if–

(a)it appears to an officer of Revenue and Customs that the deductible amount exceeds the amount actually deducted, and

(b)condition A or B is met.

9(2)  In this regulation–

“the deductible amount”  is the amount which a contractor was liable to deduct on account of tax from a contract payment under section 61 of the Act in a tax period;

“the amount actually deducted”  is the amount actually deducted by the contractor on account of tax from a contract payment under section 61 of the Act during that tax period;

“the excess”  means the amount by which the deductible amount exceeds the amount actually deducted.

9(3)  Condition A is that the contractor satisfies an officer of Revenue and Customs–

(a)that he took reasonable care to comply with section 61 of the Act and these Regulations, and

(b)that–

(i)the failure to deduct the excess was due to an error made in good faith, or

(ii)he held a genuine belief that section 61 of the Act did not apply to the payment.

9(4)  Condition B is that–

(a)an officer of Revenue and Customs is satisfied that the person to whom the contractor made the contract payments to which section 61 of the Act applies either–

(i)was not chargeable to income tax or corporation tax in respect of those payments, or

(ii)has made a return of his income or profits in accordance with section 8 of TMA (personal return) or paragraph 3 of Schedule 18 to the Finance Act 1998 (company tax return), in which those payments were taken into account, and paid the income tax and Class 4 contributions due or corporation tax due in respect of such income or profits;

and

(b)the contractor requests that the Commissioners for Her Majesty's Revenue and Customs make a direction under paragraph (5).

9(5)  An officer of Revenue and Customs may direct that the contractor is not liable to pay the excess to the Commissioners for Her Majesty's Revenue and Customs.

9(6)  If condition A is not met an officer of Revenue and Customs may refuse to make a direction under paragraph (5) by giving notice to the contractor (“the refusal notice”) stating–

(a)the grounds for the refusal, and

(b)the date on which the refusal notice was issued.

9(7)  A contractor may appeal against the refusal notice–

(a)by notice to an officer of Revenue and Customs,

(b)within 30 days of the refusal notice,

(c)specifying the grounds of the appeal.

9(8)  For the purpose of paragraph (7) the grounds of appeal are that–

(a)that the contractor took reasonable care to comply with section 61 of the Act and these Regulations, and

(b)that–

(i)the failure to deduct the excess was due to an error made in good faith, or

(ii)the contractor held a genuine belief that section 61 of the Act did not apply to the payment.

9(9)  If on an appeal under paragraph (7) that is notified to the tribunal it appears that the refusal notice should not have been issued the tribunal may direct that an officer of Revenue and Customs make a direction under paragraph (5) in an amount the tribunal determines is the excess for one or more tax periods falling within the relevant year.

9(10)  If a contractor has deducted an amount under section 61 of the Act, but has not paid it to the Commissioners for Her Majesty's Revenue and Customs as required by regulation 7 (payment, due date etc. and receipts), that amount is treated, for the purposes of determining the liability of any sub-contractor in respect of whose liability the sum was deducted, as having been paid to the Commissioners for Her Majesty's Revenue and Customs at the time required by regulation 8 (quarterly tax periods).

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By SoL
13th Sep 2013 12:24

For a plumbers business, I was under the impression that whereas installations fall under CIS, "service work" is outside. If you look at this with reference to the section on "Systems generally" and "Repairs of systems", you may be able to get some wriggle room depending on the nature of the work carried out by the subcontractors.

http://www.hmrc.gov.uk/manuals/cisrmanual/cisr14090.htm

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By Wilts
13th Sep 2013 13:48

Blimey Martin,

They don't make these things easy do they and always leave it open to enterpritation??

Will have to read this a few times to understand it fully but feel "he should have operated a CIS scheme" will be their answer they will give.

I don't believe the sub contractors he used have declared that any CIS was stopped and can only assume they have declared all of their income but have no way of proving that even if I had their accounts??

 

Sol, interesting view, again it depends on your take on things but some of the sub contract work was done by a tiler after a bathroom refit so don't really think they would wear that as Repairs although to us you could call it that?

The other was for rubbish clearance which could well fall outside the CIS scope?

Thanks for all of your advise and please keep it coming, I will keep you updated of the progress.

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7om
By Tom 7000
13th Sep 2013 19:34

@martin

1st class answer

 

Those 3 years at  Oxford and membership of the Bullingdon club was not wasted ;)

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By Hollyhurst
14th Sep 2013 12:58

need to register

i had to look at this issue some time ago when national firm insisted that a sub contractor had to operate the CIS system. The system has to be operated in the "construction " industry but not so for repairs etc. in my case the subs were  be kitchen fitters where they are replacing kitchens - they do not have to register. This was confirmed by a local inspector.

So it depends on the work they do!

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By Wilts
16th Sep 2013 10:50

Hi all and thanks for your comments.

It would seem again it's all about how you see things and the subcontractors work descriptions are along the lines of what was done i.e. labour and materials rather than a description saying repairs or servicing?

It would  appear the work done was actually tiling in bathrooms/kitchens after my clients work was done which isn't clear if it was a repair or renewal/replacement or even a complete new bathroom?

It's interesting that most of you have a slightly different view on what are the same rules which proves how difficult it is to be clear and precise in exactly what the legislation is?

Keep the comments coming please to help build up the armoury?

Thanks again

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