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!.
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 !