Contractors CIS question

Lifeisbutadream

I put a query regarding CIS payments to sub contractors in the small biz section and was very kindly answered by Bean Counter.

It turns out that my small business should have been deducting tax from contractors working for us. We have not been doing this, we have simply been paying their invoices and leaving them to pay their own tax.

I have now registered as a contractor and will have to deduct tax from them from now on. Apparantly the HMRC may make you pay 'back tax' - i.e. the tax you should have paid for the contractors (even though they have paid their own tax - therefore the tax is actually getting paid twice!).

My question is, should I declare that I have not been doing this, pay the tax and deduct it from contractors future invoices? can I do that?

The principal of this means that I absolutely no way upon this earth would pay tax twice unless someone were able to off-set it (either us or the contractor) I feel so strongly about this that I would actually go to prison rather than pay it! Our business is simply not making money yet and the contracors usually end up with more money than us as it is!

Bean_Counter

Morning.

Two approaches immediately spring to mind.

Firstly you could consider contacting the HMRC CIS helpline or your local tax office and speak to them. State that you were new to being a contractor rather than a sub-contractor and didn't fully understand the impact of the new CIS scheme. You could try doing this anonymously to start and see what they suggest.

Secondly, and possibly the best way would be to approach your subbies. Depending on your relationship with them, you could appraoch them and explain that you should have deducted tax from them and hadn't. Some of them might have gross status anyway, in which case you were right to not deduct any tax. If they were 'old CIS4s', then they would have known that they should have had tax deducted in the first place. The good news is that it does not cost them anything in so much as they would have been able to offset the tax deducted against their monthly PAYE return or self-assessment return in the same way that I guess you probably do. The bad news is that there would be a timing difference for them with cashflow implications.

Unless anyone has any better ideas, it might be worth trying option 2 first, as if it fails then at least you can tell HMRC that you have tried to sort it.

Lifeisbutadream

Our relationship with the subbies is fantastic - they all worked together with my OH when employed with the same company years ago - they too are quite new to being self-employed and so nobody really knew what to do (they are all too busy doing actual work!) and know that and would have absolutely no problem whatsoever in allowing me to take of their tax on future invoices as a back pay, if that is what I am allowed to do.

What is gross status?

I have tried ringing CIS helpline anonymously, but they always ask who I am - I darent make up a name - I am crap at lying!

So do you think that I should go back over all the previous invoices and deduct the tax to pay and pay it on my first return? would this only apply from 1st April this year?

Sorry to keep asking more questions. I really do appreciate your help on this.

Bean_Counter

Lifeisbutadream wrote: »

Our relationship with the subbies is fantastic - they all worked together with my OH when employed with the same company years ago - they too are quite new to being self-employed and so nobody really knew what to do (they are all too busy doing actual work!) and know that and would have absolutely no problem whatsoever in allowing me to take of their tax on future invoices as a back pay, if that is what I am allowed to do.

What is gross status?

I have tried ringing CIS helpline anonymously, but they always ask who I am - I darent make up a name - I am crap at lying!

So do you think that I should go back over all the previous invoices and deduct the tax to pay and pay it on my first return? would this only apply from 1st April this year?

Sorry to keep asking more questions. I really do appreciate your help on this.

No problem over the questions.

Gross status is where you have a 0% tax deduction (the old CIS5 and CIS6.)

One thing that HMRC might be able to help with is the (free) presentations by their Business Support Teams. They did loads in the run up to the new CIS and were pretty good. The must do more to cater for new contractors coming ino the market. Have a look at this link for starters (scroll to the bottom for the CIS bit.) That will help a lot with the monthly returns and other requirements, a lot of which can be done on line.

I would see if I could get on a course sharpish. Then you find out what the proper way of dealing with matters is, and you get to ask questions face to face. I found the HMRC guys very helpful. A question perhaps along the lines of "A subbie forced me to make a payment to him before I could come on the course or he would pull off site. What do I do to correct it?" might be acceptable.

Recommended reading from my earlier posts now that I am back at work is booklet CIS340. I might seem a big read, but is quite readable and cover most of the CIS changes.

The new CIS scheme only operates from 6 April 2007 (of course there was the old CIS scheme). Did you pay any subbies before this?

In summary, I would try to go back and sort out the older payments and redo them after deduction of tax. Of course go on the course first to find out how to record these transactions.

Finally, if you want another opinion, try speaking to some contacts that you might have at other (possibly bigger) contractors. Construction is a small world and you'll find someone to spend an hour face to face to show you the ropes I'm sure.

Lifeisbutadream

Yes we have paid at least one subbie for over 18 months as he has always worked with OH. They are basically 'partners' but without the status (he has been bankrupt and we had already put thousands into setting up the business) he has his own business also and any jobs that we get we split with him 60/40 for the labour and any that he gets he splits with us 60/40. He doesnt pay our tax either, we have just been invoicing each other and paying our own tax.

We have also paid electricians/plumbers/plasterers for any work they have done for kitchens/extensions etc. again we have just paid the invoices. we often do work for their businesses too.

We are certainly not a huge business (yet) we have an extremely high turnover (predicted £200,000 this year) because we do extensions and kitchens, but a relatively low profit margin (predicted 22% this year - bear in mind there is myself and OH in the Partnership and we both work full time) I think that is why this gets my goat, because we are genuine, do not take 'cash' jobs, always pay VAT, do not fiddle anything and are basically trying to create a business for our future.

Bean_Counter

Lifeisbutadream wrote: »

Yes we have paid at least one subbie for over 18 months as he has always worked with OH. They are basically 'partners' but without the status (he has been bankrupt and we had already put thousands into setting up the business) he has his own business also and any jobs that we get we split with him 60/40 for the labour and any that he gets he splits with us 60/40. He doesnt pay our tax either, we have just been invoicing each other and paying our own tax.

We have also paid electricians/plumbers/plasterers for any work they have done for kitchens/extensions etc. again we have just paid the invoices. we often do work for their businesses too.

Eek. I am assuming that most of those involved are an old CIS4 and that you weren't preparing vouchers etc either.

To be honest it is hard to know what to advise other than the obvious tell HMRC. I can see your reluctance not to do this. Do you have an accountant prepare your books that you can turn to for advise?

Lifeisbutadream

Bean_Counter wrote: »

Eek. I am assuming that most of those involved are an old CIS4 and that you weren't preparing vouchers etc either.

To be honest it is hard to know what to advise other than the obvious tell HMRC. I can see your reluctance not to do this. Do you have an accountant prepare your books that you can turn to for advise?

No I wasnt preparing vouchers, I had no idea that I had to. At one point I asked one of the plumbers, who often contracted work to us and he said that you didnt have to, it was only bigger businesses that had to. At the time I just accepted it because I simply didnt have time to look into anything.

I have just changed accountants because my previous one was crap. It was a friend and she didnt even notice that we were going to go over that VAT threshold. We still may get a fine for that if they investigate as we were over for 4 months without realising or charging customers VAT. We wanted to go limited and she advised us against it. It then turned out that was because she couldnt do the returns for a ltd co!

My accountant is on hols at the mo - he has our books now and I will hopefully be able to speak to him about it when he returns.

Do you think it is really bad?

Bean_Counter

Lifeisbutadream wrote: »

Do you think it is really bad?

To be honest I don't know, as I have not been in that position and that is why I was hoping you had an accountant who had a broad range of construction clients and might know.

This is certainly not deliberate tax evasion as you are not being deliberately dishonest. Also there are certain to be many others in the same position as you. There are also many more who deliberately evade tax within the construction scheme.

However, HMRC are never happy at missing out on tax revenue. The biggest thing in your favour is that you are taking action to resolve it (for example by already registering as a contractor.)

Hopefully your accountant will be in a position to give you some good advice when they return from holiday.

Lifeisbutadream

Bean_Counter wrote: »

However, HMRC are never happy at missing out on tax revenue.

I understand what you are saying, but where are they missing out on tax? they are getting paid tax when the sub-contractors pay their tax

I know that there are many people in my position - all the subbies who we have hire out subbies themselves and non of them are aware of what they should do as far as I know.

The HMRC must think these people have nothing better to do than go on courses and read 1000 page documents on what they should and shouldnt do. Fortunately for my OH, our business is a Partnership and I am able to find all this out (slowly but surely!) there is no way he would have had a clue if it had been him doing it alone - OH and most of his subbies work 12 - 14 hour days, 6-7 days per week. To be fair, I know that the fat cats at the top think that everyone just sits there whilst the money rolls in, as they do :rolleyes:

stratty

The last thing I would do is make the tax office aware that you should have been making these deductions and issuing vouchers and just hit the floor running with it now you are registered as a contractor.

There is no loss of tax to HM Revenue and Customs because the gross income received by your subcontractors will be declared on their own Tax Return rather than them having 18% credit against the final liability.

They have had the benefit of receiving gross income without the deductions and I am suprised that they never mentioned to you that you should be writing vouchers.

I work at a firm of accountants as a Tax Senior so if you have any queries feel free to pm me or email direct to james.stratford@gmail.com

Bean_Counter

Lifeisbutadream wrote: »

I understand what you are saying, but where are they missing out on tax? they are getting paid tax when the sub-contractors pay their tax

I see your point, but unfortunately that is not my understanding of the way that HMRC view it. They view it as the rules are there to be obeyed and tax should be accounted for accordingly.

One specific example of their logic behind this in a case where some treated an employee as self-employed and failed to deduct PAYE, HMRC did not give any credit for the tax that they person had already paid in his self-employed capacity (Demibourne Ltd v HMRC, Special Commisioner UKSPC 23.6.05, for anyone interested.)

The moral being, don't necessarily expect logic to apply.

However, on the more positive side if you approach HMRC rather than them discovering you, then they will usually work with you rather than be all draconian from the start.

Wait and see what your accountant advises when they return from their holidays.