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CIS refunds: Why companies get a better deal


Anil Patel explains why limited companies and sole traders are treated differently when it comes to deductions and claiming refunds under the Construction Industry Scheme.

7th Jan 2022
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Questions regarding Construction Industry Scheme (CIS) deductions (also known as ‘CIS tax’) and reclaiming excess deductions arise time and time again.


Any deductions under the CIS are treated as a “payment on account” of a subcontractor’s tax liability. However, at the time the legislation (FA 2004 s57 to s77) was drafted, the government sought to treat limited companies differently from sole traders and partnerships.

The main distinction can be found at FA 2004 s62.  Under this provision, any deductions suffered by a sole trader or partnership are treated as being a payment on account of the tax due on that subcontractor’s “relevant profits”, whereas any deductions suffered by a company are treated as being a payment on account of that company’s “relevant liabilities”.

Why the government sought to make this distinction is unknown. I have not been able to locate any reference to section 62 having been debated within the House of Commons Hansard Debates documents. Save to say, the only reference to this particular clause that appears within the debate documents is “Clauses 58 to 64 ordered to stand part of the Bill.”

Consequently, we can’t draw any conclusions as to why the government sought to make this distinction between incorporated and unincorporated businesses.

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Replies (9)

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By Winnie Wiggleroom
08th Jan 2022 09:39

Not really sure why you are confused as to the different treatment, it has always made sense to me - generally a sole trader will not employ other staff or subbies and the tax deducted covers that years tax liability which don't forget also reduces payments on account.

A company on the other hand is more likely to have a PAYE liability so it makes sense to be able to offset suffered against ongoing liabilities.

If you allowed a sole trader to claim it back any earlier they would spend the money and not be able to pay the tax in January and have you tried explaining payments on account recently?

Thanks (1)
Replying to Winnie Wiggleroom:
David Ross
By davidross
10th Jan 2022 09:43

Actually a self-employed person such as a 'ganger' (the original target of CIS in the 1960s) could readily have employees and subcontractors. CIS exists to make it uneconomic for such people to operate as in the following example (using the original rate of 33%);

Mr Donkey Jacket pulls in £1000 a week working on the new motorways and 'employs' nine workers, Donald Duck, Mickey Mouse (etc). The plan is that they each get £100 each but since the Disney characters don't actually exist, Mr Jacket's really income is £400 or so.

Not only does CIS force the workers to be proven to exist, Mr Jacket's contractor has to deduct 33% of £1000 and pay it over to HMRC, so Mr Jacket only gets £667 and has to pay out £900, putting him out of business unless he has sufficient funds to carry him to the end of the year and get a whacking refund.

We should remember that the original scheme did not exclude genuine businesses, who could get an Exemption Certificate, which in the 1970s acquired a photo and were credit card style. A legitimate business could get paid gross and have no trouble employing subbies, either paying them 100% or part to HMRC and part to the subbie. My early career with the Inland Revenue was largely spent verifying and issuing these 715s. Before the £30,000 threshold, vast numbers of building workers enjoyed this exemption.

PS lots of Disney characters also printed newspapers, and scandalously the Inland Revenue let the proprietors off

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By Roland195
09th Jan 2022 11:52

There is also the issue that generally speaking, unincorporated businesses get refunds automatically on filing their return and usually without issue whereas Companies are forced down a Byzantine process of duplicate & even triplicate filings of the same figures already reported by both contractor & subcontractor that can come off the rails at any point with no interest from HMRC at all.

Thanks (3)
10th Jan 2022 09:28

Still a problem where the company does not have a PAYE scheme (of which there are many). In fact if you wish to make a comparison it is sole trades that have the easier time of it

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David Ross
By davidross
10th Jan 2022 09:41

Thank you, Anil, for an excellent article, which gives context. Especially well done for looking at Parliament's intentions (I have been in Court where the Judges asked similar questions and checked Hansard for the debates)

Just one thing - this stuff is so old, how far back were you able to look? Did you find the original concept of the scheme, or a point at which it was 'carried forward'? It was there when I joined the Inland Revenue in 1975 but I don't recall when it first came in. I was told it arose in the 1960s but I may be wrong.

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Replying to davidross:
By Anil Patel
11th Jan 2022 09:09

davidross wrote:

Thank you, Anil, for an excellent article, which gives context. Especially well done for looking at Parliament's intentions (I have been in Court where the Judges asked similar questions and checked Hansard for the debates)

Just one thing - this stuff is so old, how far back were you able to look? Did you find the original concept of the scheme, or a point at which it was 'carried forward'? It was there when I joined the Inland Revenue in 1975 but I don't recall when it first came in. I was told it arose in the 1960s but I may be wrong.

Hi David,

The set-off provisions only came into play at the time the New CIS was introduced (2007) by virtue of the 2004 Finance ACt and as such, I researched the debates relating to the 2004 Finance Act.

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By johnjenkins
10th Jan 2022 11:08

Great article, but a little belated by a few years. The time taken to get a refund for Limited Companies is disgusting and reasonless. HMRC say it's for fraud reasons. I think they just don't have the man power to check everything. In the days of district offices, a five minute phone call sorted out everything and money was released.

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By geraldw
10th Jan 2022 15:50

I'm not sure that Ltd companies get such a great deal. What they can't set off has to be paid through the tax year. To me, this means that HMRC could be raking in corporation tax long before it is due.
For example
Job value 10,000
Less material costs 1,000
Net 9,000 x 20% = 1,800 to pay

So tax is effectively being paid on overheads and profit before any accounts are prepared

I can see why CIS tax was brought in - to stop labour only subbies disappearing without
paying a penny in tax.

But HMRC's current harder approach of not paying tax on the labour element, but everything
other than materials is downright wrong in my opinion.
They should stick to collecting tax on the labour element only

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By richard thomas
13th Feb 2022 17:39

I am coming very late to this party. I saw the headline on 7 January 2022 just before I went abroad for 18 days holiday and when I returned I had forgotten about it. It came back to mind as a result of something else I read, and as I was intrigued by the heading I have considered it further and so here is my 2d worth.

I have to say that my initial view was one of slight surprise that companies got a better deal than individuals when they suffered CIS deductions because they couldn’t or didn’t or wouldn’t get gross receiving status. Reading the comments some others thought this too.

It’s worth (at least it is for me trying to grasp the thesis put forward) looking at what the legal provisions are and how they relate to the general system of returns and claims for each type.

For the sole trader or a partnership whose members are within the charge to income tax*, they will inevitably be traders who are required to deliver a tax return, because they have been advised or told to “register for ITSA”.

One interesting point about this is that the self-employed subcontractor who receives payments from which CIS amounts (NOT tax) have been deducted is not likely to be liable to pay any balancing amount of tax at 31 January because expenses will mean that deduction at 20% will be excessive.

A person who receives income to which PAYE applies is not required to notify chargeability (s 7(4) & (5) TMA). Under s 7(6) the same applies to a person if all their income is income on which income tax is treated as paid and if they are not liable at a rate above basic rate. This would seem to apply to the average subcontractor in a repayment position, subject to two qualifications.

One is that what the CIS amounts are deducted from is not “income” in the sense described in ITA 2007, but of course turnover. Two is that the CIS amount is not income tax ab initio – it might be if there is an IT liability from the trade, but it might also be deemed Class 4 NIC.

But assuming that subcontractors do register for ITSA, then the provisions of s 59B(1) TMA apply and they are entitled to a repayment if the amount of income tax in their SA is less than the payments on account and any income tax deducted at source (which includes deemed deductions and payments – s 59B(7)). They are entitled to repayment on 31 January and not before (s 59B(4)).

A subcontractor who did not notify and who therefore did not make a return could make a claim under s 42(11) and Schedule 1A TMA.

A company is subject to the provisions of Schedule 18 FA 1998 and ss 59D to 59E TMA.

Section 59D(1) gives the due and payable date as 9 months plus a day after the end of the AP. Section 59D(2) provides that that day is also the day when any repayment of CT is due if the tax payable is less than the total of relevant amounts previously paid as shown in the CTSA. “Relevant amounts” means any CT paid and not repaid and any amount treated as CT paid by virtue of regulations under s 62 FA 2004 (s 59D(4)(a) and (d)).

Section 59DA TMA is irrelevant here given the disregard of CIS deductions in ss (7) so companies get no advantage over individuals that way.

So far then on a general level there is almost equal treatment – repayments are due either 9 months and 25 days or 9 months and 1 day after the relevant period.

At a more detailed level there are provisions relating only companies in regulation 56 of the Income Tax (Construction Industry Scheme) Regulations 2005) SI 2005/2045 (“CIS Regulations”). This, as the article points out, provides a number of restrictions on any repayment that is due to the company.

First, a repayment cannot be made to a company until the tax year has ended (regulation 56(5)(a)). This might be thought to be a statement of the bleeding obvious – but is more subtle than it might appear. The reference is to the “tax year”, not the accounting period. So if a company’s AP ends on 30 April and it receives a net payment on 6 April, it cannot claim repayment of that amount as if it were CT until after 5 April in the following year. This can disadvantage, as compared with an individual, any company receiving post 5 April payments in any AP ending between 6 April and 31 May, because it cannot get a repayment until more than 10 months have elapsed since the end of its accounting period.

There is an implication in this, that only CIS amounts deducted before 6 April can be repaid at the normal s 59D time, but there must be difficulties in determining the amount that can be so repaid

Second, a company has got to show that it has accounted for and paid for any CIS amounts it was required to deduct and pay in the tax year beginning during its AP and any amounts due under the PAYE regulations. That takes it to at least the 22nd April, not 6 April before it can possibly get repayment.

Note that there is an exception to these two rules where the company is in insolvency and has entirely ceased.

Third, before any CIS amounts suffered can be repaid, they must be set, in this order, against:

• any liability to employees Class 1 NICs

• any liability to employers Class 1 NICs

• any liability to account for PAYE

• any liability to account for student loan repayments

• any liability to account for refunds of payments of SSP etc

• any liability as contractor for s 61 payments

Application of the CIS amount reduces the amount of the liability and the amount available to be setoff against CT liability of the year or repaid. But before any repayment of any amount not set off can be made HMRC may retain an amount to meet any outstanding established CT liability of an earlier AP.

(Regulation 56(2) and (6))

Only after that will any balance be treated as CT which can enter the s 59D calculation.

This seems to put companies at a slight disadvantage compared with individuals, in that an individual will get repayment interest under s 102 FA 2009 from the date the deduction was suffered until the date of repayment on the whole of the amounts deducted while a company will only get repayment interest under s 826 ICTA 1988 on the balance after all the set-offs under regulation 52. It should be noted that the general rules of tax set-off in s 130 FA 2008 apply to individuals so that if there are any employers or contractors among them HMRC can use any potential repayment to meet outstanding liabilities under PAYE or CIS, with a knock on effect on repayment interest.

There are also provisions relating to in-year claims. Regulation 17 of the CIS Regulations is headed “In-year repayments of provisional excess credit” and applies to individuals and firms (ie partnerships and LLPs). It provides for an application, not a claim, for a payment of an amount by which:

The amount of deductions suffered at the point in the tax year when the application is made (A)


the IT and Class 4 payable of the whole tax year on the subcontractor’s trading profits less cumulative personal allowances and MCA so far. Other income from which tax has not been deducted so far as arising in the portion of the tax year before the claim and any sum due and payable under ICTA or TMA eg as a contractor under s 61 FA 2004. (B) (Regulation 17(3))

An application cannot be made if any earlier year’s IT and Class 4 is unpaid (which will make an application impossible before 31 January in the year.

A repayment (not an application) cannot be made after the year end (regulation 17(5)).

The reference in B to the tax on the whole tax year’s profits would seem to require that an application can only be made after the end of the tax year, but this is prohibited by regulation 17(5). HMRC’s SAM and CISR manuals support this apparent condition (see SAM40040 and 75030), but references in those manuals to cessation cases does point to a use of this otherwise rather odd provision. If the trade has cased during the year then the taxable profit will be known or at least calculable before the year end – and this notion is confirmed to an extent by the reference in paragraph (a) of item B to the cumulative entitlement to personal allowance at the date of application (though what that means is anyone’s guess, as the PA does not accrue nor is it abated anymore on a monthly basis).

SAM40040 also says that a claim (sic) for a regulation 17 repayment must be made on form CIS40 or it will be rejected. There is nothing in the law making this a lawful approach, as the application is not a claim governed by s 42 TMA. The stress by HMRC that a refusal is not appealable proves this point. Yet another example of HMRC manuals mis-stating the law to a taxpayer’s disadvantage.

I can see nothing comparable for company sub-contractors, though s 59DA TMA does deal with claims for repayment before liability is established. It requires there to have been a payment of CT after which the companies circumstances change, but given the wording of s 59DA(7) and (8) it seems very unlikely that this would be of use to a company subcontractor.

It may be that the above which sets out the law as I see it is not how things are done in practice and so I have looked at HMRC’s manuals. CISR75000+ deals with deductions suffered by subcontractors.

For ITSA subcontractors CISR75020 says claims for “credit” (either set-off against “established liabilities under SA” or repayment) can be made in the return.

The SA103S (Short self-employment pages) has as box 38 a place where total CIS deductions are to be entered. SA103F (Full pages) has the same thing at Box 81. Neither refers to that entry being a claim. The Notes to Box 81 refer to the taxpayer having already claimed a repayment and received a repayment, but otherwise does not refer to claims.

The use of the word “claim” is also misleading. It is no more a claim than when I put the amount of PAYE I have suffered on the employment pages in my return.

SA75020 goes on to talk about repayments and says that they are only made after the amounts deducted are set against the IT & Class 4 payable on the trading profits for the year of deduction (which accurately describes the s 59B process) AND against the IT & Class 4 payable on the trading profits unpaid for any earlier year. The latter is not part of the s 59B process and, although s 130 FA 2008 set-off may be applied to achieve this, that is not part of the s 59B process as the manual states. The fact that the manual refers to previous year’s trading profits rather than SA liability generally suggests that s 130 set-off is not what it refers to. Another example of Manuals being wrong in law,

The practice referred to does though put subcontractors on a par with companies where regulation 56(6) applies, and not in a better position.

There is nothing in CISR about company deductions which is contrary to the law. CISR76020 confirms there are no in-year repayments for a company.

With that rather over-lengthy preamble I turn to the article.

Under “Legislation” the writer cannot find anything in the debates in the House of Commons to explain the different treatment of companies. If I were trying to find out the answer I wouldn’t look there first, but at the HMRC material provided for the Budget. By the way, the Explanatory Notes for the Bill are useless – HMRC certainly didn’t and don’t put their brightest policy minds on CIS (or CGT for that matter). However I think Winnie’s explanation is highly likely, though I’m sure David Ross is right too (though individuals can apply for gross payment).

Under “Unincorporated refunds” the writer suggest that CIS amounts can “only” be offset against tax (and Class 4 NICs) on trading profits. Section 62(2) says that the CIS amounts are treated first as tax paid in respect of those profits, and if the amounts exceed the IT in respect of the profits, as Class 4 NICs. Two things arise from this. First who determines what the tax is on the profits where the taxpayer has other income (eg earnings from employment, pensions or income from savings). Is the PA set against the trading profits or the other non-savings income? But assuming the answer is obvious because the trade is the only source, there is nothing in s 62 to stop the normal s 59B TMA process from applying so that if there is other income, the excess over the ss (2) amount is set off against any such liability before being repaid.

Under “Corporate refunds” the article talks about a company being “permitted” to set off CIS amounts against various liabilities incurred as employer or contractor. But surely it’s not a matter of being “permitted” – it’s mandatory, isn’t it?

I’m also not clear about the next sentence. If there is a CT liability on the relevant profits then it is set off against them in accordance with s 59D TMA and s 62(3)(c), and only any excess is repayable (s 62(3)(d)). It is not a question of asking HMRC to kindly not repay and to keep the amounts to set off against CT liability.

The last sentences refer to the new rules about which the writer has published a later article to which I shall respond later.

Under the heading “Impact of deductions being set-off” I don’t understand what is meant by “lost money”. Lost by who? How? I’m made none the wiser by the next two paragraphs – “made from a subcontractor” is wrong, isn’t it? Shouldn’t it be “made to”?

The last sentence is the only thing I can see which might justify the heading of the article to the effect that companies are favoured by s 62 FA 2004. It boils down to the fact that the company gets its repayment earlier than an individual in that it has less to pay HMRC under PAYE or CIS on a current basis.

The example suggests that HMRC is out of pocket in the scenario described. But it has received the CIS amount deducted by the company’s contractor before the payment by the company is due.

This requirement to set any CIS amounts against PAYE & CIS current liabilities, so diminishing them, is, I accept, a small cash flow advantage to companies in the position of being employers and contractors, subject to them being able to earn enough on the funds to match the repayment interest accruing to individuals.

But is it such an advantage as to justify the article’s claims? And what are accountants and their subcontractor clients reading it meant to do about it – it’s the way the system is.

I return to Winnie’s point – in most cases it is comparing apples and pears. Most subcontractors (It or CT) not registered for gross payment are not employers or contractors as well. For them there is little difference in the systems for repayment, if any. That makes the comparison in the second paragraph under the heading “Legislation” somewhat spurious. It ignores that fact that CIS deductions are also treated as being a payment on account of CT on relevant profits (s 62(3)(d)) and therefore the treatment of individuals and companies is the same when there are no relevant liabilities.

And it can plausibly be argued that the “tax year” v AP point for companies disadvantages them compared with individuals, even those with a non 5/4 or 31/3 basis period. Such people with say a 31/12 basis period can set CIS deductions suffered on payments in the following three months against the profits of the basis period.

A company also suffers from the requirement that it must have paid all its PAYE liabilities before it can get repayment.

On balance I do not think the heading is justified by the content or the actual position in law (or, probably, practice).

* The treatment of a member of a partnership or LLP who is a company is unclear.

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