CIS treatment for the Subbies of a Subcontractor?

How should our Subcontractor treat his subcontractors invoices in relation to Net Materials Costs

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A subcontractor has invoiced us, and I have queried his Materials element.  He has responded by saying that he used a Subcontractor for a large part of the installation and that has skewed his percentage.  I have thought about this, and convinced myself that the Total Net cost of his subcontractors invoices should be included in his Material element, but I cannot see anywhere in the CIS manual that shows the correct way to treat this?

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JCACE
By jcace
09th Aug 2018 22:35

A deduction made under the Scheme should only be applied to that part of the payment not representing the direct cost of materials to the subcontractor (FA04/S61 (1))
Subcontractors are not materials.

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Replying to jcace:
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By scorbett
10th Aug 2018 09:28

How would you treat the Material/Labour split of the invoice that our Subcontractor (A) has received from their Subcontractor (B). Bearing in mind that B is gross status, so doesn't need to supply a material figure?
Can I also argue that A has provided us with a finished product, which is a material, so the direct cost of providing that material will be the invoice from B (which contains Labour and Materials)
A subcontractor is allowed to class manufacturing costs as materials, is this not a similar situation?
Please note it is not the labour of our Subcontractor, but the labour of our Subcontractors (A) Subcontractor (B).

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By frankfx
10th Aug 2018 00:32

Flemming & Son Construction (West Midlands) Ltd v HMRC

worth looking at the above case to focus the mind on HMRC expectations

Labour will never be 'materials'.

By the way Claritax books have an excellent book on CIS regulations , with a good commentary on the practicalities in the real world.

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Replying to frankfx:
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By scorbett
10th Aug 2018 09:43

Thanks frankfx
I have looked at the above case, but I'm not sure it has helped me.

Labour can be classed as 'materials' - eg manufacturing a product.

There are not many companies that offer the service of our Subcontractor, so I am trying to keep them happy, but also bearing in mind the expectations of HMRC.

Ideally I would like to go back to our subcontractor with something definitive from the HMRC, which shows how they should treat their subcontractors costs, in relation to the labour/material split on their invoice to us.

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By Marion Hayes
10th Aug 2018 10:32

My questions would be
a. are you a contractor and, if so, why?
b. what has been supplied to you?
c. what exactly has been supplied by the other sub-contractor?
d. what exactly has been done to the raw materials to transform them into a totally different product? Unlike a fitting of a central heating system or fitted kitchen where it just involves (usually) fitting existing elements

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Replying to Marion Hayes:
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By scorbett
10th Aug 2018 10:51

Hi Marion - In response....
a. Yes - we provide construction services to our client. These constructions project often have various elements, which we will subcontract out.
b. Our subcontractor has supplied and installed a MUGA (Multi-Use Games Area)
c. Their subcontractor has supplied and installed the playing surface.
d. Our subcontractor has manufactured and installed the cage that surrounds it, and the components on the inside.

This is why the problem has arisen, because the labour to fit the actual cage, is quite minimal to the total project, but obviously it is making sure the material amount hasn't been overstated. And their subcontractor invoice could obviously go a long way towards that material value.

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Replying to scorbett:
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By legerman
10th Aug 2018 13:05

Is your subby a Ltd Co? If yes, then he can offset the cost of CIS gainst his PAYE bill (if he employs people as well that is) If not then in normal circumstances he will have to wait until the end of the tax year to get that cost back as part of his CIS repayment. Or he can go gross status if he's eligible.

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Replying to legerman:
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By scorbett
10th Aug 2018 15:12

I've yet to meet a subcontractor who will happily pay any extra tax from the absolute minimum, regardless of when they can reclaim it.

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Replying to scorbett:
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By legerman
11th Aug 2018 00:38

scorbett wrote:

I've yet to meet a subcontractor who will happily pay any extra tax from the absolute minimum, regardless of when they can reclaim it.

Maybe not, but them's the rules. I have a subby client who also has 2 subbies himself so I know how frustrating it is.

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Replying to Marion Hayes:
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By scorbett
10th Aug 2018 12:23

Thanks Marion, CIS 340 is always my first point of call, but I am trying to ascertain how to interpret the HMRC guidance in Step 2 of CIS340, para 3.12

"Step 2: Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations...:

materials (please read paragraph 3.13)"

Should I use:
i) the whole of the amount the subcontractor actually paid for the playing surface (because I far as I am concerned that is the material that was supplied to us)
OR
ii) only the material amount the subcontractor actually paid for the playing surface - if so, because his subcontractor is gross registered and doesn't need to provide a labour/material split, how do we get to that value?

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