CIS tax deducted from contractor payments

CIS tax deductions

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I have a subcontractor client whose Contractor is under HMRC compliance investigation. HMRC have questioned the tax calculation which was based on my client's direction that 20% of his invoice was for labour.

Having downloaded the recent article by Sage and (??) under the paragraph - Deduction of tax - "this should only apply to the labour element of the sum invoiced". This has always been my understanding.

However, HMRC are approaching it from a different angle - Gross less materials and third party equipment hire. This would seem to suggest that CIS tax is calculated on the profit element of the job. It also requires the subcontractor to accurately identify the materials allocated to each job. HMRC also want to disallow third party testing as "materials" even though it is a direct cost of completing the work.

Help please.

 

Replies (9)

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Stepurhan
By stepurhan
02nd Nov 2016 11:38

CIS has always been calculated on the gross amount (excluding VAT if applicable) less certain allowable costs. This just usually happens to result in it only being deducted on labour costs because most 20% subcontractors only provide labour and materials.

Both Sage and you were incorrect in understanding otherwise. See Finance Act 2004, Chapter 3, s61. http://www.legislation.gov.uk/ukpga/2004/12/part/3/chapter/3

It is up to you whether to pursue the third party testing as meeting the definition of materials per the legislation. HMRC guidance is not on your side on this one, so expect them to contest any argument you put forward.

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By geraldw
02nd Nov 2016 12:34

Thanks for the clarification.
Not sure about most subcontractors only supplying labour and materials. There are many large construction companies out there who appear to be suffering 20% CIS tax on their profit element way in advance of the normal tax collection dates.

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Replying to geraldw:
Stepurhan
By stepurhan
02nd Nov 2016 12:45

geraldw wrote:

Thanks for the clarification.
Not sure about most subcontractors only supplying labour and materials. There are many large construction companies out there who appear to be suffering 20% CIS tax on their profit element way in advance of the normal tax collection dates.

Large companies should be able to apply for gross status. I have no doubt you are right that there are large companies that have not done so though (possibly due to failures to pay tax on time rendering them ineligible).
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RLI
By lionofludesch
02nd Nov 2016 13:38

I wouldn't have thought third party testing (whatever that is) qualified as materials. It sounds more like a service.

Worth fussing about ? Bearing in mind it's only a timing difference ?

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By craig preece
02nd Nov 2016 13:55

I'm confused by the term "profit element", as Stepurhan as stated it is gross less allowable costs, the balance is labour.
If he invoiced for £1,000 with no materials or other costs would he say 50 hours at £10 labour and 50 hours at £10 profit so CIS only due on £500?

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Replying to craig preece:
Stepurhan
By stepurhan
02nd Nov 2016 14:21

craig preece wrote:

I'm confused by the term "profit element", as Stepurhan as stated it is gross less allowable costs, the balance is labour.
If he invoiced for £1,000 with no materials or other costs would he say 50 hours at £10 labour and 50 hours at £10 profit so CIS only due on £500?

I didn't use the term profit element.

But, to clarify the point, a subcontractor doesn't have any financial cost of providing their own labour, so all of the labour part of a bill could be considered a "profit element". You can't split it by coming up with some arbitrary "cost" of that labour.

If they get in subcontractors themselves which are then supplied on to customers, you still don't deduct the cost of those labourers (i.e. CIS still taken on the full amount net of materials only). However, the netting off of CIS deducted on income and CIS you deduct from subcontractors has a similar effect to only having CIS deducted on the profit.

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Replying to craig preece:
RLI
By lionofludesch
02nd Nov 2016 14:29

craig preece wrote:

I'm confused by the term "profit element", as Stepurhan as stated it is gross less allowable costs, the balance is labour.
If he invoiced for £1,000 with no materials or other costs would he say 50 hours at £10 labour and 50 hours at £10 profit so CIS only due on £500?

For CIS purposes, a subcontractor doesn't get a profit on materials. He can't do a job for £1000 and say that £500 of that was for materials that only cost him £200. CIS would be calculated on £800 in such a case.

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By Manchester_man
02nd Nov 2016 14:24

A lot of contractors also think that mileage is an allowable cost for CIS deduction purposes. But it isn't

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Replying to Manchester_man:
RLI
By lionofludesch
02nd Nov 2016 14:32

Manchester_man wrote:

A lot of contractors also think that mileage is an allowable cost for CIS deduction purposes. But it isn't

Yeah - lodgings, too.

Very common error.

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