Phil the Flue supplies and fits woodburners. He is a sole trader and has never employed anyone or had any subcontractors. One day when fitting an appliance he comes across a dodgy fireplace that needs rebuilding. He is not qualified to do it and so calls in Billy the builder to do the work. Phil quotes his customer £1,200 and he pays Bill £1,000. Phil keeps the other £200 as his admin fee and thinks no more about it.
Andy the accountant is preparing Phil's VAT Return a couple of months later and spots the payment to Billy. He explains to Phil that this payment falls within the CIS scheme and that he should have registered himself as a contractor, deducted tax and made monthly returns. Phil does not have a clue about CIS and the lack of tax deduction etc is down to an innocent error due to a lack of knowledge about something that has never concerned him in the past and was unlikely to concern him for the future.
Andy seems to remember in the dim and distant past that HMRC said they would take a softly softly approach to innocent errors and that as long as it could be shown that it was innocent or that Billy was registered for SA and had included this amount on his tax return and paid any tax and class 4 nic due then no tax would be chased under regulation 9. He believed his client was covered and so did not report the payment and advised his client to ensure that customers paid "subbies" direct in the future should the situation arise again.
He thought no more of it.
A month further down the line Phil receives a call from the HMRC asking questions about his business records. Andy deals with all record keeping but instead of suggesting that HMRC contact Andy he tried to answer the questions himself and unsurprisingly gave rather wishy washy answers. HMRC decided that they needed to do a business records check to ensure that they were adequate.
During the check the payment to Billy was seen and noted by HMRC and passed to another section of HMRC. 3 months later Phil received a copy of a letter sent to Andy advising that he had information that he had made payment to at least one subcontractor without deducting tax and without registering as a contractor and he was now liable for substantial penalties for failure to register and failure to submit contractor returns. Phil was incensed by this letter and instead of phoning Andy, he phoned HMRC and said that his accountant knew all about the payment but had told him not to bother registering.
Andy in the meantime appealed against the penalties on the grounds of innocent error by the client and was covered by Regulation 9. HMRC agreed that the tax may be covered but not the penalties. Andy then submitted a supplementary appeal against the penalties on the grounds that they were unwarranted, disproportionate and not chargeable because no tax was actually in charge due to regulation 9. He asked for this go to tribunal.
The appeal duly went in the tribunal queue and Andy put the file away whilst he awaited a further notification.
Andy thought no more about it.
Another month passes and he receives a visit from the men in black. "We understand that you have been complicit in assisting clients to avoid their tax responsibilities and we have come to undertake a review ...."
Am I being paranoid?
Replies (15)
Please login or register to join the discussion.
You have to laugh ... (or cry) ...
How did we manage to end up with a system where such a simple arrangement can cause such a lot of grief????
Presumably if Phil had got his customer to engage Billy directly, all this nonsense would have been avoided.
Likewise if Billy had been paid in cash "under the counter" no-one would have been any the wiser.
And they wonder why there's such a large black economy!!!!
I believe this is covered by the legal tenet "ingorance of the law is no excuse"
Andy should always cover his backside by putting his advice in writing. If the client ignores it so be it.
CIS is a best kept secret
The majority of people have never heard of CIS.
I think flyers are sent occasionally to self-employed people in the construction industry by HMRC, but people in other trades are totally unaware of it's existence, unless they have an accountant. Having an accountant only clears up the resultant problems, as the accountant will quite often be unaware of them employing subbies ... until after the event.
Shirley
Are you saying that Billy (why not Bob?) the builder would be totally unaware of CIS? I think not. He could have put Phil straight.
Why?
Are you saying that Billy (why not Bob?) the builder would be totally unaware of CIS? I think not. He could have put Phil straight.
If Billy has only ever ran small domestic jobs himself then it's entirely possible that he too is unaware of CIS. Even if he had worked on building sites as a contractor himself in the past, it would not seem reasonable to expect anyone to know that it would apply in the above situation for a domestic job.
No, I am not saying that
Are you saying that Billy (why not Bob?) the builder would be totally unaware of CIS? I think not. He could have put Phil straight.
I said that people in trades other than the construction industry were unaware of CIS. If they get a one-off job that requires hiring building subbies they may fall foul of CIS, unless the subbies make him aware of CIS deductions (and I wouldn't rely on that happening either).
I was speaking to an investigation specialist recently
He was dealing with a case where a firm of accountants were under scrutiny in not dissimilar circumstances to Andy.
To be fair to HMRC, they won't just assume based on one incident that Andy's bent, but what they were doing to this firm of accountants was opening enquiries into more clients of the firm, to see if they'd got another Christopher Lunn on their hands.
So one Phil the Flue getting it wrong, can have repercussions across the rest of your client base.
I agree with Bernard, that it's best to communicate (what may later prove to be) material advice in a written form, perhaps by email. At least it documents the advice (and the quality of it) that you've given.
It's a mess when decent hardworking individuals find themselves in an impossible situation. HMRC has brought into being a process that continues to discourage compliance. There is no sensible route to compliance that doesn't involve eye watering and potentially bankrupting penalties. Contrast CIS penalties with the Lichtenstein Disclosure Facility; in the latter people who have almost certainly deliberately tried to avoid tax are given a relatively painless route to compliance. With CIS errors and failures to register etc. there is no such manageable route to compliance. HMRC does need to think seriously about a more carrot and less stick approach. Hopefully there will be some Tribunal decisions coming through that will ameliorate the current Catch 22 situation.
CIS a dodo?
I haven't done any CIS work in an age. The reason is that the rules and penalties are so much red tape now that the builders are just putting in invoices now on an ad hoc basis. CIS is not worth the candle anymore.
I don't know who Phil's customers are but they should just save themselves a lot of money and trouble dealing with dodgy contractors by installing a bio ethanol fireplace instead!
But you forgot to put a phone number or address on your ethanol fireplace website, Danny Richardson of Breckside Park, Anfield, Liverpool.
I do hope you're not Dan the Dodger.