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Contractor refusing to operate CIS

Contractor refusing to operate CIS

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An electician client of mine regularly does work for a contractor who has not been witholding CIS tax from the payments made to my client. Although this is not my client's problem, they are close friends with the contractor, and since raising the matter my client has spoken with the contractor to alert him to the penalties he will incur if/when he is caught for this non-compliance.

Here is the reply my client received from the contractor which is now causing them to question the advice I have given them regarding the proper application of the CIS :      

Further to your questioning why I don't withold CIS tax in  paying your invoices I have just managed to speak with my accountant on this.

Both their and my understanding (and I HAVE been deeply involved with this before) is that; if a construction based firm engages what is regarded for tax purposes as casual labour, usually individuals or small groups, who are not properly considered businesses, then the CIS Rules apply. Where two, or more, legitimate businesses engage in trade, of whatever form, then bona fide invoicing is the norm (and I've been doing this for years). Since you are also V.A.T. registered and so charging, this establishes a payment stream easily monitored by the tax authorities. The CIS system was inaugurated to make sure that people being casually paid, usually in cash, on new builds, in the building trade only, could not contrive/conspire to avoid their legitimate taxation.

The use of CIS is often misunderstood, or misinterpreted by accountants and others; some accountants mistakenly advise their clients to adopt this system, regardless of business type, and you end up with butchers, bakers and candlestick makers etc. involved in a system they have no need to be in, especially where cheques and direct bank payments are the norm. Under your accountants interpretation, even Joe Public, having a new socket put in, would be required to deduct tax and make a monthly return. Some accountants advise it because it makes their lives easier.

I got involved with CIS before some years ago, believing it was my duty to make deductions, but unnecessarily as it turned out, and I have no wish to do so again. Having correctly deducted and paid the individuals' involved tax for the duration of their employment, I finished up with two problems;

A/ After the need for their services finished, I still had to register a "Zero Return" every month. Whilst tiresome, this was no great problem, but, having been then told by the tax authority that I could do so by phone, I found myself in a long, drawn out wrangle, lasting over a year, because they proceeded to fine me a hundred quid, EVERY MONTH FOR ABOUT SIX MONTHS, claiming I hadn't made proper returns! Fortunately, I had made proper notes, including names, but I had to involve two MSPs, my MP and pay an accountant to sort it all out. Somewhere I still have a letter from the Chancellor of The Exchequer's office admitting their responsibility, but still contriving to blame me for having made unnecessary returns in the first place!.
And
B/ Sometime later, I had the individuals'  accountant chasing me for reimbursement, because he claimed his clients had had to pay twice on the same income and that the CIS system should not have been applied! This was easily resolved when we pointed out he had certification for the deductions.

 I would strongly suggest you avoid CIS like the plague! Under no circumstances will I become involved with it again. 

 

Normally this would be laughable, but I'm angry that this has caused my client to doubt my advice.  Some days I just feel like giving up !   

 

 

Replies (44)

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By Wanderer
04th Mar 2021 11:51

As you are suggest, a ridiculous response by someone who has no idea!

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By FayeBK
04th Mar 2021 11:59

I can confirm that it's possible to laugh out loud at the stupidity while simultaneously seething with rage. What a joke.

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Red Leader
By Red Leader
04th Mar 2021 12:02

What is the context of the electrical work your subbie does for the contractor? Is it possible that it falls into one of the exemptions? I'm not a great expert at CIS but it's a thought anyway.

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Replying to Red Leader:
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By L Haldane
04th Mar 2021 12:05

My client is an electrician. The work he does in not exempted.

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Replying to L Haldane:
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By rmillaree
04th Mar 2021 14:00

"My client is an electrician. The work he does in not exempted."

Are you categorically sure ? the reason i ask is with regard to the exemption available with regard to repairs and maintenance reference building service systems!

https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-re...

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By I'msorryIhaven'taclue
04th Mar 2021 12:01

So your client has done all he can to remedy matters, and you have a letter to prove it.

Time for a MLR report?

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By sonoftwosheds
04th Mar 2021 12:04

Blimey, I wouldn't like to be his accountant, if this is what he advises, fun and games ahead when one of his clients gets picked up for this.

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By lesley.barnes
04th Mar 2021 12:11

Oh dear, bet they are not operating the reverse charge on the VAT either. Hope he has made proper notes this time and got his MSP's MP and his accountant on standby when it all goes wrong. I'm sceptical that he has an accountant because the contractors knowledge is woefully wrong about who is caught under CIS. He says that he had to pay an accountant to sort out his mess last time it will cost him more this time.
Is there an off chance it is repair or extension to an existing system is it?
https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-re...

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By SWAccountant
04th Mar 2021 12:13

CIS making accountants lives easier. That's the best bit.

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By Paul Crowley
04th Mar 2021 12:24

Hilarious
Neither 'accountant' nor contractor have the slightest clue of how the CIS really works
Coverage has increased. Not just new build or extentions.

Neither has read anything on the subject and think it was just to stop The Lump?
That is 50 year old thinking
I mean from 50 years ago
not a 50 year old person

This might be post of the week, even with a Budget day included

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By Paul Crowley
04th Mar 2021 12:28

Send your client a link to this page
It only takes seconds

I do it periodically with my clients

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By frankfx
04th Mar 2021 13:00

Wow.

I dohope this goes viral, though I will not be the first mover.

Imagine a million shares before the end of the tax year.

Make it happen.

The Main contractor accountant, will he feel that his views have been misrepresented?

He seems to have continued to act for a wilfully non- compliant client.

This one could run and run.

Though I sympathise, with the OP.

Having to invest time educating a client againt this back- drop.

Do not give up in the face of another's ignorance.

You are better than that.

A question :

David Winch does the OP have AML obligations?

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Replying to frankfx:
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By L Haldane
04th Mar 2021 13:08

It did occur to me that this ridiculous situation puts me in a position where I now have to make a SAR. It would be helpful to know how others view this.

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Replying to L Haldane:
RLI
By lionofludesch
04th Mar 2021 14:25

L Haldane wrote:

It did occur to me that this ridiculous situation puts me in a position where I now have to make a SAR. It would be helpful to know how others view this.

Steady - an SAR for what ? Who's the victim here ? Who's lost money ?

Nobody.

All we have is someone not complying with HMRC regs. There's no tax lost.

It's an HMRC matter. All you can do, if you want to take action, is send a copy of this missive to HMRC and suggest that an "educational" visit might be appropriate. Personally, given the fella's attitude, I'd be more than happy to do that.

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Replying to lionofludesch:
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By SimonStone
09th Mar 2021 12:35

I agree here. Of course the treatment is laughably wrong, but no SAR required IMO.

Contractor gets a bill for £1,000. Instead of paying £800 to the subbie and £200 to HMRC, he has paid the subbie the full £1,000. The contractor hasn't benefitted in any way, apart from an admin saving on time I guess.

It is annoying when your advice gets questioned though - usually that's from 'man in the pub' rather than another accountant!

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Replying to SimonStone:
RLI
By lionofludesch
09th Mar 2021 12:46

Importantly, neither has HMRC.

Sure, they ought to be looking after 20% until the tax return is submitted but CIS is about collection, not assessment. Only the timings have changed.

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By CazzyT
04th Mar 2021 13:06

Wow ..... I want to comment but find myself speechless!

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Jason Croke
By Jason Croke
04th Mar 2021 13:52

I doubt the author of the letter has spoken to any Accountant on this, but mentioning an Accountant in the first sentence adds gravitas I suppose. A bit like starting an email with "I've taken advice from my lawyer and.....", yeah sure you have.

So in summary, contractor got burned for failing to comply with CIS rules, creates his own virtual world where CIS doesn't exist and then produces several paragraphs of waffle to show that virtual world is better than reality and crucially, legal.

Sounds like the sort of thing a tax specialist would write :)

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RLI
By lionofludesch
04th Mar 2021 14:01

"The use of CIS is often misunderstood....."

He's spot on there.

How does he reckon this reverse charge thingy works if there's no need to be CIS registered if you're VAT registered ?

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By mumpin
04th Mar 2021 14:08

There's a large housebuilder in Scotland that doesnt deduct CIS from subbys and pays them in full (well, less retentions). They're big enough to sponsor a SPL football team. No subby is allowed to invoice them (as CIS legislation would then kick in). The subbies have to make an application for payment. I just dont think that CIS compliance by contractors is really policed by HMRC.

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Replying to mumpin:
A Putey FACA
By Arthur Putey
04th Mar 2021 14:21

They don't deal with VAT registered subbies then?

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Replying to mumpin:
paddle steamer
By DJKL
09th Mar 2021 15:00

Is that the lot with the sheep?

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By New To Accountancy
04th Mar 2021 14:23

I've just had the same scenario and the other accountant said (about me) 'I've heard about her, she's new, lot's to learn'

Whilst I agree I've lots to learn, I think he has too.

This is a big firm too, so the subby is never going to believe me.

I used to put so much effort into convincing people of the right thing to do, but it's exhausting and you're never listened to, they will go with the accountant that gives them the answer they want to hear, regardless of the possible consequences.

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Replying to New To Accountancy:
RLI
By lionofludesch
04th Mar 2021 14:27

Don't worry.

It's not the subbie's problem.

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Replying to lionofludesch:
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By New To Accountancy
04th Mar 2021 14:36

I know, but I know the contractor and the subby told me their arrangements. I mentioned it to the contractor, and that's how and why the contractor's accountant became involved.
The contractor has been in business for years, and their accountant is very successful, so I've not a chance in hell of being listened to. They just think I'm some silly little girl challenging the big boys.

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By jon_griffey
04th Mar 2021 14:39

Just send them the link to CIS340.

https://www.gov.uk/government/publications/construction-industry-scheme-...

And ask the contractor to get the advice of his accountant in writing.

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Replying to jon_griffey:
RLI
By lionofludesch
04th Mar 2021 14:43

jon_griffey wrote:

And ask the contractor to get the advice of his accountant in writing.

Yes - he'll be able to claim on the accountant's PI.

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By Calculatorboy
04th Mar 2021 16:00

That is shocking
I'm sure sparks will fly
Hes obviously got his wires crossed.
You should explain he will find the penalties Hertz

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Replying to Calculatorboy:
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By legerman
05th Mar 2021 11:59

Calculatorboy wrote:

That is shocking
I'm sure sparks will fly
Hes obviously got his wires crossed.
You should explain he will find the penalties Hertz

He's obviously not a bright spark!

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Replying to Calculatorboy:
A Putey FACA
By Arthur Putey
05th Mar 2021 12:47

Go ohm

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Replying to Arthur Putey:
Red Leader
By Red Leader
09th Mar 2021 12:34

Watt?!

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Replying to Calculatorboy:
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By DaveyJonesLocker
09th Mar 2021 12:42

Wonder why he has Resistance to operating the scheme properly?

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Replying to Calculatorboy:
paddle steamer
By DJKL
09th Mar 2021 15:04

There is certainly potential for a difference of opinion with HMRC, in fact they might end up in a duel.

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Stepurhan
By stepurhan
04th Mar 2021 16:42

That is laughable, but the fact that it has made your client doubt your advice is not.

I would take the approach with your client that they are not exposed either way. It is the contractor's responsibility to deduct CIS and it is them that will get in trouble for it should HMRC find out they are wrong. Provided your client does not claim for CIS not deducted, it does not affect their own tax affairs apart from timing of tax payments.

So confirm you are right, but reassure your client that it doesn't directly affect them anyway.

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By Ammie
09th Mar 2021 10:26

Under A/ lies the truth. Compliance is a "pain" and does want it or to pay someone to deal with it nor to deal with HMRC who have already challenged him and are too close for comfort.

If this contractor is so confident perhaps the scenario can be settled by referring it to HMRC for their view? Perhaps even throwing in his name for good measure. (Withdraw tongue from cheek!!)

Incidentally, I am a little lost as to why this contractor has spent the time writing this letter in the first place, unusual, even more so if they are "mates". Odd very odd. Wonder if they are both in on it to sway you!

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By Donald MacKenzie
09th Mar 2021 10:29

The contractor is deliberately and wrongly refusing to comply with the CIS rules.

See extract from HMRC site

Overview
You must register as a contractor with the Construction Industry Scheme (CIS) if:

you pay subcontractors to do construction work
your business does not do construction work but you usually spend more than £1 million a year on construction
You may be a sole trader, in a partnership or own a limited company.

If you’re not sure if you need to register, check who is covered by CIS.

Rules you must follow
You must register for CIS before you take on your first subcontractor.

You must check if you should employ the person instead of subcontracting the work. You may get a penalty if they should be an employee instead.

Check with HM Revenue and Customs (HMRC) that your subcontractors are registered with CIS.

When you pay subcontractors, you’ll usually need to make deductions from their payments and pay the money to HMRC. Deductions count as advance payments towards the subcontractor’s tax and National Insurance bill.

You’ll need to file monthly returns and keep full CIS records - you may get a penalty if you do not.

You must let HMRC know about any changes to your business.

Dangerous mix arrogance and stupidity.

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Replying to Donald MacKenzie:
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By rmillaree
09th Mar 2021 11:08

"The contractor is deliberately and wrongly refusing to comply with the CIS rules."

i am going to upset the applecart here and say i am not 100.00% convinced the op has provided enough detail to confirm categorically that an exemption from cis might not apply.

Note i did provide the op with specific link to example of work that could possibly be outside the scope of cis - and did ask for confirmation that they were certain this exemption wouldnt apply and they didnt answer.

https://www.gov.uk/hmrc-internal-manuals/construction-industry-scheme-re...
This link has the following to say with regard to items that are not within cis - note this section relates to "building service systems".

Note i am in no way saying its likely the exaemption from cis could apply - just that without confirmation that it doesnt are we sure the op knows of the specific available exemption?

As its not the op's clients problem to determine cis status i think looking for all potential outs available for customer before jumping to conclusions makes sense - as it could be unecessary egg on ones face if there is an exemption available that no one here is pointing out.

anyway examptions ref "building service systems"
Therefore, repairs to any of these systems are outside the scope of CIS. Soldering a leaking pipe or patching a leaking boiler, replacing a defective tap, rewiring a single defective circuit, replacing a burned-out ventilation fan motor, replacing a broken wash basin, fixing a leaking radiator or replacing standard radiator valves with thermostatic valves, are all plainly repairs to a part of the overall building system.

Even where the repaired/replaced item may represent a significant component part of the overall system, such as a central heating boiler, its replacement does not constitute ‘the installation of a system of heating’ and therefore will not fall within CIS.

As mentioned above only the installation of building systems is within CIS. As with repairs, extensions to systems will similarly be excluded, this could be for example, the addition of an extra radiator to a central heating system, or the wiring of additional electrical plug sockets.

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By matttaxnpayroll
09th Mar 2021 11:00

I have a reverse issue - client (individual) entered a profit-share arrangement with a company. Signed a very briefly written document confirming the relevant profit shares. Company buys property, pays for renovations which client completes/oversees. Company has now registered for CIS and deducted tax from the payments of profit on the sale to the client.
Surely the arrangement should be a partnership so no CIS between the partners?
CIS deducted is substantial (£17k), so ideally would unravel this but I'm not overly hopeful of a result on this front. Any thoughts/ideas?

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Replying to matttaxnpayroll:
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By rmillaree
09th Mar 2021 17:37

Any thoughts/ideas?

That sounds like a ridiculous situation its its opaqueness - i would say though that the cis element should only ever be a cashflow problem from an accountancy point of view so unless its obviously wrong treatment if you go with the flow do the credits not ensure the situation is as it should have been anyway with regard who is delaring taxable profits where ?

Practicably speaking if the individual has provided construction services on site and is getting paid for providing those construction services then its not obvious to me that cis treatment is wrong particulalry if the individuals pay is akin to that of an engaged self employed site forman (who might be paid via success fee) - payments to an engaged site forman who is sole trader would likely fall within cis. Obviously i am ignoring any employment status issues here and i would agree saying a is b doesnt make it so so i am somewhat thinking aloud here and may be missing your point perhaps?

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Replying to rmillaree:
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By matttaxnpayroll
10th Mar 2021 11:40

Thank you - I feel I am hijacking the thread a little, so will leave it at this. You are quite right that overall he's not really losing out as it's money in HMRC's pocket that he won't have to pay when he does his tax return, but cashflow-wise I'd rather have that much money in my pocket than in HMRC's.

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Replying to matttaxnpayroll:
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By rmillaree
10th Mar 2021 13:04

I would agree with your sentiments - if the cis has already been declared trying to unwind it if there is any % chance that it could turn out that the arrangement was within cis anway or even if it looked to hmrc like it was to the extent that they get the wrong end of the stick - then i suspect trying not to reverse the grey area error may be the best option?

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RLI
By lionofludesch
09th Mar 2021 11:24

Often the suggestion that the position is checked with HMRC prompts a reappraisal and, very often, a volte face.

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By Gone Sailing
09th Mar 2021 13:04

HMRC is entirely responsible for the CIS mess.
Don't they have a telephone directory and cars, y'know, like VAT inspectors used to do?

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By Gone Sailing
09th Mar 2021 13:46

@ rmillaree identifies some interesting distinctions.

I once got embroiled in a debate where a private citizen with some spare cash wanted to buy a 'doer upper' derelict house and was eventually put off by the CIS debate, ie. installation or repair, and believed that they wouldn't find the subbies if they had to deduct CIS.

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