A 2014 case highlights that clients often do not understand when and what they need to deduct from subcontractors. What are the common misconceptions?
Not just labour-only subbies
In Laithwaite v HMRC when Laithwaite (L) had taken on a labour-only subcontractor, he was advised by his accountants to register for CIS and make the appropriate returns ,which he duly did. However, his accountants did not specifically advise him that he would also need to make returns for subcontractors who supplied materials as well as labour which led to him submitting incorrect monthly returns. Fortunately, the tribunal was satisfied that L genuinely believed he was operating the scheme correctly as a result of relying on the advice of his accountants and so allowed his appeal against the penalty.
Not just on labour costs
Clients often think that they just need to deduct CIS tax (20% or 30%) from the labour element of a subcontractor’s invoice. However, while this may usually be the case, if travelling (including fuel costs), accommodation and subsistence expenses are included in the subcontractor’s invoice, these must also be included in the amount from which tax needs to be deducted (3.21 CIS340).
As well as materials, ensure clients are aware of the other cost items that can be deducted to arrive at the amount liable to CIS including VAT, CITB levy and fuel used for plant (not travelling) (3.22 CIS340).
In summary, if a contractor does not deduct the right amount of tax, it’s they who will remain liable for that tax to HMRC not the subcontractor. Ensure clients are aware that travel and subsistence payments should not be deducted in arriving at the amount liable to CIS tax.