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CIS problem

CIS problem

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Hi all,

Just wondering what peoples thoughts would be on a client we have just picked up. The clients acts as a self employed ducting fitter. The client has used 2 subcontractors dating back to July 2010 and not informed HMRC. They have accumilated approx £3000 worth of CIS tax deducted from the subcontractors, and seemed oblivious to the fact this was not their money and that they may actually need to pay this to somebody!!

What would people suggest as a way of resolving this matter incurring as few penalties for the client as possible. I am concerned there may be penalties dating back to July 2010 for the client and each month after this which will run into several thousands?

Any advice greatly received.

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By Roland195
09th Nov 2011 10:57

Unusual

It is usually the case in these circumstances, that the client is (or claims to be) unaware of the need to make deductions from the subbies. While not recommended, it would be far easier to use a Nelson eye over the previous payments then register the client to do so from now on.

In this case, I am not sure there can be any realistic argument. They obviously knew to make deductions yet for some reason kept them for themselves.

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By Jekyll and Hyde
09th Nov 2011 10:41

Money laundering report

I had a similar issue last year. A potential new client deducting CIS and not being registered. He was also charging vat and not vat registered. I decided not to take this client on as something smelt very bad. To top it off I did a directors search and found that he had 4 previous companies and after 18 months (2 companies running side by side) he closed all companies down without preparing any accounts.

He was quite unpleasent to me when I said that I would not be interested in acting for him. I have since spoken to 2 other accountants who got involved and exited very shortly afterwards for similar reasons.

I would do 2 things:

1) whatever happens make a Money Laundering report. I did with this potential new client.

2) Do further background searches on this individual. You never know what you may find out. It might be the case that they are that stupid and do not have a clue on tax issues and therefore there may be good fee's (and potential hassle) involved or they may be even worst than that and drop you in it.

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Replying to The 5-50 Coach:
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By Roland195
09th Nov 2011 11:14

A wee bit harsh

Chesterfield accountancy wrote:
You never know what you may find out. It might be the case that they are that stupid and do not have a clue on tax issues and therefore there may be good fee's

That is a bit unfair. In respect of CIS, I have come across quite a few clients who genuinely had no idea that it might apply to them. For example, it seems unfair (to me anyway) that a sole trader painter & decorator who's only trade is wall papering old ladies sitting rooms should know that he will fall within CIS if he gets his joiner pal to shift a dado rail of some such.  

 

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Replying to coolmanwithbeard:
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By Mature Student
09th Nov 2011 13:43

Meatloaf

Roland195 wrote:

Chesterfield accountancy wrote:
You never know what you may find out. It might be the case that they are that stupid and do not have a clue on tax issues and therefore there may be good fee's

That is a bit unfair. In respect of CIS, I have come across quite a few clients who genuinely had no idea that it might apply to them. For example, it seems unfair (to me anyway) that a sole trader painter & decorator who's only trade is wall papering old ladies sitting rooms should know that he will fall within CIS if he gets his joiner pal to shift a dado rail of some such.  

 

This is a good example of how CIS is easily misunderstood, For CIS to apply, you need 3 things - a contractor [who engages] a sub contractor [to perform] construction operations - all of which are as defined in the legislation. As Meatloaf'warbled, 2 out of 3 ain't bad, but it does mean no CIS.

Using the above example, a home-owner is not a contractor, so long as the painter carries on only doing work for homeowners then the use of a joiner to work alongside him would not fall within the scheme because you don't have a contractor.

From the description of what the OPs client does, it may be that he is a contractor but it's worth checking it out, as well as checking you have a sub-contractor and construiction operations.

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Replying to JC:
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By KH
14th Nov 2011 12:13

Not an expert on CIS, but...... I would have thought that in this instance the painter becomes a contractor as soon as he hires his friend to move the dado rail ... and I agree that the householder can never be the contractor, regardless of how much he pays to have work done on his house, but the builder doing the painting and decorating work can easily find himself in the role of contractor as soon as he pays his friends in to help him ... No? Or am I missing something so blindingly obvious that I need an early morning malt whiskey (large glass) to smooth those leetle grey cells into sense?

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Replying to MissAccounting:
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By Roland195
14th Nov 2011 12:46

That's what I thought

KH wrote:

Not an expert on CIS, but...... I would have thought that in this instance the painter becomes a contractor as soon as he hires his friend to move the dado rail ... and I agree that the householder can never be the contractor, regardless of how much he pays to have work done on his house, but the builder doing the painting and decorating work can easily find himself in the role of contractor as soon as he pays his friends in to help him ... No? Or am I missing something so blindingly obvious that I need an early morning malt whiskey (large glass) to smooth those leetle grey cells into sense?

That was my understanding. If the joiner invoices the painter & decorator then CIS applies. If the old lady pays the joiner directly, then CIS does not. Ignoring the gross over simplification and other issues like VAT, it does not make much sense to me that one scenario relates to the Construction Industry and one does not when the same work is being done by the same people.

 

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Replying to coolmanwithbeard:
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By Mature Student
09th Nov 2011 13:43

Double post - sorry

x

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By occca
09th Nov 2011 11:13

What about the subcontractors who will now not be able to reclaim the CIS tax as it was never paid over

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By Jekyll and Hyde
09th Nov 2011 11:40

Deduction of CIS tax from subcontractor

If a person does not undertsand CIS tax regime, then how would he/she understand to deduct the tax from the subcontractor in the first instance. £3,000 has been already deducted from the sub-contractors and I agree with OCCA, these poor subcontractors will have a good time trying to get this resolved with HMRC. On the basis that the tax has been deducted, then were proper tax deduction certificates provided to the subcontractors? Propably not.

This isn't  a case of the odd CIS subi, working on a limited basis, it is £3,000 worth of CIS deductions and therefore at best £10,000 worth or expense. that would be 30% tax deducted.

If the client is oblivious to the fact that the CIS regime operates, and they work within the trade sector and deduct tax at source from its sub-contractors, then they should be engaging in the specialists (accountants/tax advisors/etc) before they proceed, not some 15 months later. To me that is stupid. It would be like me building an extention to my house, without even thinking about obtaining planning permission until after the extension has been completed. Just stupid and I would expect at this point an independant planning officer would be rubbing his hands together at the thought of either the extention being pulled down or his fees for getting the planning permission in restrospective.

 

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Replying to martynaling:
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By Roland195
09th Nov 2011 11:55

Bad example

Chesterfield accountancy wrote:

If a person does not undertsand CIS tax regime, then how would he/she understand to deduct the tax from the subcontractor in the first instance.

I did not mean this case in particular where I basically agree with you but just meant to illustrate that CIS can be a disaster waiting to happen through genuinely no real fault of the client.

 

 

 

 

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By 2156806
09th Nov 2011 11:47

Are activities definitely CIS

Had a similar problem recently and client was issued with tens of thousands of pounds of CIS fines for late registration (automatically genereated by computer in about 60 or 70 envelopes which gave client a bit of a scare) - they had deducted (at the request of the subcontractor) and had paid over tax but not submiited any CIS returns.

We got involved and reviewed actual activities of subcontractor and these fell outwith CIS scheme - succesfully argued with HMRC and all fines were cancelled.

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By Jekyll and Hyde
09th Nov 2011 13:51

I agree the CIS regime is sometimes impossible to work with...

..and I would further add that I have had personal problems, most recently in September 2011 when I was in hospital and I asked on this site (whilst in hospital) about mitigating excuses for a late CIS return,as i was concerned that 2 of my clients would face them. I also agree that HMRC can be extremely difficult to deal with at the best of times and their penalty system for 99% of clients can be extremely harsh considering the difficulties that we all face. Poster 2156806 highlights this perfectly and this may be the angle that the original poster Adam may look at.

I would certainly agree that the vast majority of the tax system is extremely complex and for me, as an accountant, self-assessment is the worst thing going. You self assess your income on the rules that are present at the time, and some time later HMRC can decided whether to disagree with you or not and large penalties maybe generated as a result. Seems very unfair. I preferred the pre self assessment system where a tax return was submitted and HMRC assessed you on that or enquired further. Seems more fairer.

Anyway back to my original post I was looking at this case specifically and I see this across all our tax system. A business, whether trade or service, does something without getting proper professional advice before doing so. The only defence is that HMRC has for a decade or so stated "Self assessment doesn't have to be taxing" what utter rubbish and have given individuals false hope that our entire tax system is simple. We all know it isn't. But in this specific case I do not see that as a defence as the client actually deducted CIS tax from the subcontractors and therefore they should have considered that further implications may apply and sought professional advice/help at that point. If they did obtain professional opinion at the time, then there is litigation that could happen, but surely the client would then not have be oblivious to the CIS scheme. It would not have cost them much as most accountants I know do not charge as much as they should for monthly CIS returns, etc  but now there is potential good fees to be had for sorting out this mess. 

If they did not, in my view they are either stupid (I agree harsh word and this could be replaced with others, but I will stick with this word as I originally used it) or worst and it was deliberate. In my example I gave the result was that the potential new client appeared to have a history of collecting VAT/CIS tax and not handing it over to HMRC and before any issues came to light closed the company. To me this is deliberate and not stupid, but either way I still covered my back by making a money laundering report on the grounds of suspicion. I would also do the same if I were Adam and make a ML report. Or at least delve into the history of the individual to determine that there is any deliberate actions being takem by the client.

Things we are not aware of:

1) Is this individual new to business?

2) Have they previous accountants?

3) Have they had previous businesses?

These were the 3 questions I asked myself and found a history (directors name search) and discovered that it may have been more sinister. Hence I decided not to act and I am certainly glad I did not from what I have heard since.

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By Roland195
10th Nov 2011 11:32

ptillotson

Just to clarify for my understanding, I thought in the case of the painter & decorator that I outlined above, if he contracts with the joiner, not the home owner then this does fall within the remit of CIS.

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By littletosh
10th Nov 2011 15:47

Hi all, thanks for the comments so far. The client has no issue paying over the tax to HMRC, he just assumed that it would be deducted from the tax he has had deducted and he would receive any balance back. I believe it is a genuine mistake on his part. I dont think he would have any issue evan paying a small penalty but the thought of paying the best part of £10k in penalties terrifies him! Any further thoughts/ ideas appreciated.

Adam

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Replying to charliecarne:
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By matt pennifold
14th Nov 2011 13:03

Did you get a response on this from anyone? The client has had tax deducted (presumably at 30%) of a greater amount. If he had registered correctly what would be the position and isn't this some sort of defence?

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By KenKLM
14th Nov 2011 11:09

CIS

May be worth considering paying back the tax the subcontractors that he has deducted ... this will at least confrim the honesty of the client .. and then register as a contractor going forward ; maybe including all tax deducted from first month of 2011 on the first monthly return sent for 2011/12 . This way nobody loses out on any taxes due ; except the problem of the fines . He may then of course get an enquiry when he submits his self assessment return with gross payments to subcontractors ! The subcontractors can then settle their own tax liability for 2010/11 but recommend he gets them to invoice him . Strictly by the rules ; your client engaged subcontract labour from day one and is therefore a contractor and should have been doing the monthly contractors returns ... £100 fines for every month each return is late ... may be as you say a five figure sum already .

The other alternative is to treat them as PAYE employees ... which they may actually be if working on an hourly rate under your client's guidance ( see HMRC rules on self employment status )  ... the penalties are far less than back registering for CIS .

Either way your client is a dope and maybe you should consider not taking them on as , typically , these are the type of client that will always cause you headaches and then make you wait for payment of fees ;-)

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By lh3f9764bg1g
14th Nov 2011 12:08

sick, sore and tired

I have to admit that I have absolutely ZERO sympathy with the Contractor in this case. My ENTIRE sympathies lie with the Sub-Contractors who have been stiffed by a contractor who, apparently, understands that he has to deduct CIS Tax yet doesn't understand that that CIS Tax needs to be paid on to HMRC. The result of this, fortuitously for the Contractor, is that he gets to keep the money! It's great, isn't it, that such "genuine mistakes" always seem to benefit he who errs. What does he think he is, a banker? If he had failed to deduct any Tax at all I could understand but he has effectively underpaid the Sub-Contractors by £3,000. And pity them and their agents, please! How are they supposed to do their Tax Returns? Do they include this £3,000 in their Sales and pay even MORE Tax on it? Or do they not include it in their Sales and so report an incorrect figure? Do they include this notional CIS Tax in the amount stated in their Tax Return and so incur the wrath of HMRC? Or do they forego this Tax? I am sick, sore and tired of the feeble excuses of Contractors who tell their sub-contractors "oh, we don't operate CIS" or "oh we don't issue Monthly Statements" or "oh this" or "oh that". And despite the fact that it must be obvious to HMRC from the Returns that something doesn't quite tally they never seem to investigate or take action against these rogue Contractors. They, unfortunately, seem to feel that it is their obligation to hold up GOOD Contractors to the blowtorch and torture them for minor infringements such as a payment that's a few days late (big surprise, eh, in the current economic climate?) when they are likely to try to remove the Gross status of the Contractor - destroy their cash-flow and so threaten to completely destroy the business (good thinking that for a Government body, eh? put good businesses out of business!). Give me a break, pleeeeease! I just wish that Contractors would fulfill THEIR side of the bargain and HMRC theirs and that those who do their best to comply with the law should be treated fairly and get proper credit for Tax they have already paid.

Chris.

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By KH
14th Nov 2011 12:19

 

 

Meatloafptillotson PM | Wed, 09/11/2011 - 13:43 | Permalink

 

Roland195 wrote:

 

 

Chesterfield accountancy wrote:You never know what you may find out. It might be the case that they are that stupid and do not have a clue on tax issues and therefore there may be good fee's

 

That is a bit unfair. In respect of CIS, I have come across quite a few clients who genuinely had no idea that it might apply to them. For example, it seems unfair (to me anyway) that a sole trader painter & decorator who's only trade is wall papering old ladies sitting rooms should know that he will fall within CIS if he gets his joiner pal to shift a dado rail of some such.  

 

 

meatloaf PTillonson wrote:

This is a good example of how CIS is easily misunderstood, For CIS to apply, you need 3 things - a contractor [who engages] a sub contractor [to perform] construction operations - all of which are as defined in the legislation. As Meatloaf'warbled, 2 out of 3 ain't bad, but it does mean no CIS.

Using the above example, a home-owner is not a contractor, so long as the painter carries on only doing work for homeowners then the use of a joiner to work alongside him would not fall within the scheme because you don't have a contractor.

From the description of what the OPs client does, it may be that he is a contractor but it's worth checking it out, as well as checking you have a sub-contractor and construiction operations.

This is my comment ... forgot to put in the bit I was replying to in my initial response !!! bear with me, it's a grey dreek old dreary day down here......

Not an expert on CIS, but...... I would have thought that in this instance the painter becomes a contractor as soon as he hires his friend to move the dado rail ... and I agree that the householder can never be the contractor, regardless of how much he pays to have work done on his house, but the builder doing the painting and decorating work can easily find himself in the role of contractor as soon as he pays his friends in to help him ... No? Or am I missing something so blindingly obvious that I need an early morning malt whiskey (large glass) to smooth those leetle grey cells into sense?

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By trecar
14th Nov 2011 12:32

Common sense out of the door!

I have clients in the building industry who suffer suffer deduction of tax from their gross income under the CIS scheme. I find that I have to explain the rules to them all the time as they get completely confused. No! not from my explanations but from what the contractors tell them about how the scheme works.

There are obviously huge misunderstandings about the CIS scheme out there, which are compounded by fear and an ostrich like mentality over penalties and the aggressive attitude of some HMRC personnel. It does not help that the scheme has undergone several deep changes whilst HMRC have pulled back from local bases and the support has therefore contracted.

Whilst there are undoubtedly crooks out there, a regime that seeks to oppressively punish and potentially destroy businesses that get it wrong does not seem a sensible way to manage a tax system. Oh! for the good old days when you could phone your local Inspector and try and work out something that benefited all parties and enabled  a miscreant to come in from the cold.

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7om
By Tom 7000
14th Nov 2011 12:38

You have to do the returns...he has to pay the fine, he has to take his medicine or you a e aiding and abetting him to cheat her majestys revenue ( and you dont want to end up like Mr Redknapp - alledgedly)

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By johnjenkins
14th Nov 2011 14:51

CIS rules

are stupid to say the least. If you are a Ltd Co you can offset CIS tax deducted against CIS tax that you deduct. If you are not a Ltd Co you cannot offset.

If you are self-employed you can offset CIS against your personal tax liability. If you are a Ltd Co (although the point of CIS is to offset tax deducted against the tax liability of the entity) you cannot offset Corporation tax against CIS deductions.

I'm in the Tom 7000 camp, but there certainly isn't any need for MLR.

Once the painter pays the joiner that action puts it into CIS. Furthermore any business can become main contractors depending on the amount they spend on construction.

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By pawncob
14th Nov 2011 14:59

paid in Full

Presumably the subbies have sumitted returns and obtained full credit for the deductions (or even repayment) even though not remitted. Doesn't say much for HMRC  linking payments made with deductions claimed, does it!

 

 

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By johnjenkins
14th Nov 2011 15:47

@pawncob

HMRC automatically repay subbies when returns are sent in. They will do sample checks but the main check is done some time later. This is so repayments are not delayed (as in Ltd Co's). They do not have the staff to check everything at the time the returns go in.

There is a link up between contractors returns and subbies but I'm not sure how deep it goes.

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By ralarsen
14th Nov 2011 19:56

Appeal

I had a similar case, although client didn't even realise he was supposed to deduct tax from his sub-contractors.

Put in all the returns and contacted all sub-contractors to try to get tax refunded (some did others didn't - but most realised it made no difference to them whether they paid my client or HMRC).

A few weeks later we promptly received £2k of penalties as said before all in seperate letters.

I appealed stating as much of the case as possible and assuring HMRC of my clients good intentions going forward, and also explaining that the fine seemed unreasonable given it far exceeded the total CIS tax that was due to HMRC.

Client was very happy a few weeks later when I was able to report to him that I had sucessfully appealed the penalties and they had all been reduced to £nil.

Since then he has been a perfect client sending in all returns as they were due.

How can we expect someone to follow the tax systems in this country when they take years for us to understand. The client has not deliberately avoided the payment he just did not fully understand the tax system.

Best of luck with the returns and appeals.

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7om
By Tom 7000
15th Nov 2011 13:10

luck

I think you were lucky to get it withdrawn.

I had someone who didnt have any subbies, so didnt send returns in. There are still fines if nil returns dont go in. 24 Months later you can imagine the size of the fines when HMRC asked, they said pay up and he said....my limited company has no assets sorry...due to your fines its ceased trading...sorry.

 

You cant always do that though

 

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By anndartnall
16th Nov 2011 12:13

john jenkins you're right & HMRC online download is wrong!

There are faults with many parts of CIS

I recently downloaded all the CIS instructions and read that an Ltd with excess deductions from supply over PAYE could only get the money back via the CT600 route. On speaking to HMRC I was advised that this had not been the case since 6th April 2002 when it was removed. He agreed with my complaint that it was an appalling situation.

What about filling in the online CIS deductions in the month? Well, there's a misleading header in there. One of them says "total amount paid (excluding VAT)". Do they mean that? Well, no, not according to someone at CIS I spoke to. What they mean is the "total amount billed (excluding VAT)". I'm sure I don't need to point out why there is a difference (at least to other accountants).

HMRC are constantly urging online data processing from us accountants etc. When are they going to include a facility for us to input the CIS 132 data online? Surely it should have been done by now.

Finally, I try to explain to my CIS clients that it is about HMRC trying to ensure that subbies pay their taxes, and that contractors are merely the collectors, like PAYE for emplyees. I also use the VAT mechanism that ensures the end user pays VAT as an analogy to try to explain it to them (eg car, manufacturer, & steel, glass & rubber manufacturers), but it is still hard work and one contractor still saw it as a tax he had to pay! Strangely, he's not with me any more.

Ann Dartnall

abacus 161 Ltd

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