Sub Contracting/ Contracting Tax

Fishboi1

Hi, I've recently set up as self employed (CIS) I've been Sub-Contracting to a company for about 6 weeks, I get deducted 22%, 20% Tax 2% CITB, I've now got a problem that I want to have a few people sub contract to me, I spoke to an accountant who said I have to register as a contractor and verify each individuals UTR number etc. that all seems fine but even the accountant didn't seem to get his head round the tax bit.

The work I do is per meter so lets say for instance I get £5 per meter then less the tax and CITB I bank £3.90 per meter, I then want to sub contract some out to some other lads, If I make 40p off each meter they do which then leaves them with £3.50 per meter less the tax means they only bank £2.80, at that price its not worth doing, Is this the correct way of doing it or what? Have I been ill informed by the accountant? any info and advice would be greatly appreciated, thanks

zenmaster

No. You are deducting the tax twice.

If you service the meter yourself at £5 then, as you rightly state, your tax liability is £1.10. £3.90 in the bank, £1.10 to the government.

If you subcontract at 40p markup then your liability on that meter is (£5-£4.60)*0.22 = £0.09 - you bank 31p, their liability is £4.60*0.22=£1.01, therefore they bank £3.59. £3.90 in the bank(s), £1.10 to the government.

Everyone's happy.

Fishboi1

Thanks for the speedy reply, I thought that it didn't sound right when speaking to the accountant.

So how do I got about it though? Because at the minute the tax is already deducted when I receive it. Does that change after I register as a contractor? thanks again

pjclar02

After you have been trading for a year (presuming all of your affiars are up-to-date), you can apply to HMRC to receive your payments gross, so the main contractor would not have to deduct tax from you. Your subcontractors can do the same, so that the funds flow through without any tax withholding at any level.

The aim of CIS is to guarantee HMRC a tax take on payments to subcontractors, who could otherwise not register and take cash in hand. Once the subcontractors are in the tax system, filing returns and making payments, the tax withholdings can stop.

chrismac1

Note the last post is misleading in one key feature - you need £30k of CIS sales. There are numerous other tests, to sum up getting 0% deduction CIS status requires you to walk over broken glass for about 3 to 4 months. In practice more or less no small contractors bother with it.

Regsitering as a contractor is a very serious step to take. If this accountant did not mention that the CIS penalty regime is utterly ridiculous, he or she does not have the required knowledge to give you proper support in this area.

Suppose you are currently six months late with submissions from March 2012:

Right now you are 6 months late for March at £100 = £600
5 months late for April = £500
4 months late for May = £400
3 months for June = £300
2 months for July = £200
1 month for August = £100

So that lot is £2,100. If you have a reasonable excuse you can get off these, I managed to get £3,200 written off for one client but it cost him £300 in fees.

It's not unusual to get people who are years behind with say £30,000 in fines. For this reason, and other sector factors such as slow pay and no pay, I insist on all clients proposing to register as CIS contractors to set up limited companies. This has the slight drawback that the CIS tax suffered is reclaimed via PAYE - paid in July after the tax year end - instead of self-assessment - paid May.

Note that even if you are the most efficient, cleanest guy in the sector keeping excellent records most of your subbies won't be. If you are like my clients, you'll have subbies wanting paid with no UTR, or subbie A gives you the UTR of subbie B, you pay subbie A in cash and then the HMRC databse throws a wobbly. And so it goes on.

The subbies are on another job and the problems they have left you with HMRC are yours, and legally yours alone. Have a look at the CIS link on my website so you can see all the requirements for a contractor, then visaulise the most disorganised, fly by night subbie you've ever known and see if you want the responsibility for all of this.

I am not saying don't do it. Just make sure you know all of the pitfalls first.

Fishboi1

Thanks for all the info

So am I right in thinking basically until I've been trading a year and meet the criteria I will have to deduct the tax twice?

AIFOP

Fishboi1,

Several points:

1. CITB levy for labour only subcontractors is 1.5%.
2. Passing on the levy is a concern in the industry, a google search may help.
3. The CIS tax deduction is only an interim position, you may, depending on your own circumstances claim some back through your tax returns.