While you are almost certain everything has been done correctly, there is always that slight doubt nagging at the back of your mind.
HMRC do not decide to carry out a compliance review for the joy of it, they carry them out for one of two reasons. Either your business was unlucky enough to be in the very small number of random checks carried out each year, or their in house review system has spotted a discrepancy or a high risk factor worthy of closer review.
Compliance teams have a sophisticated review system to help select review cases. This pulls data from a number of sources, including the various information and tax returns your business makes and also from an increasing number of external public sources such as websites, news feeds and social media. It is best to assume that when HMRC come calling they have something they are looking for within your records.
If you engage subcontractors who provide materials you will almost certainly exclude the cost of those materials from the amount liable to CIS deductions. HMRC will want to test how you check that the amount you are excluding is not excessive. They have legal precedent to support a very strict approach on this point. If you cannot demonstrate that the amount accepted as the cost of materials is accurate then they will seek to recover any CIS they believe should have been deducted and paid over to HMRC.
The best evidence is to have a copy of the subcontractor’s invoice. If you don’t have that there are other methods that HMRC may be willing to accept but they need to be rigorous and capable of withstanding HMRC scrutiny. The days of accepting the subcontractor’s word or applying a standard percentage are gone!
Extending the issue with the cost of materials is one of ownership. The most common example of this is scaffolding, but other items such as site fencing, or lighting are also areas of risk.
A subcontractor cannot claim the cost of supplying equipment unless he actually incurs a cost in so doing. A scaffolding company can only make a claim for materials if they hire in additional scaffolding.
In most cases they will be using equipment they already own and there is no additional cost involved, so no deduction allowed and CIS is due against the full charge for providing and installing.
You have engaged subcontractors to work on a project away from their home, so it is only right to pay for their accommodation and travel and subsistence, isn’t it?
Well, paying for it is fine but excluding it from CIS deduction is another thing entirely.
The CIS rules are very clear the only items you can exclude from deduction are materials or other consumable stores, plant hire and fuel for plant, and the cost of manufacturing prefabricated components.
If you pay for subcontractors’ accommodation or the costs of getting to site and food or drink while at the work location, then this is liable to CIS deduction. There are a couple of unusual situations where this is not the case but they are exceptionally rare. Your subcontractor will still be able to claim tax relief on these costs but only through their tax return.
The exclusion for plant hire can be brought within the scope of CIS deduction if the contract includes the driver of mobile plant like excavators and diggers. This because any contract which includes any service liable to CIS deduction brings all services provided under that contract with scope for deduction. These are ‘mixed contracts’.
The solution is simple, the subcontractor should enter into two separate contracts one for the CIS liable service and one for the excluded service. Separate invoices are not sufficient the contracts must be separate as well.
It may seem obvious to a mainstream contracting business, but not all businesses are involved in construction as the central service they provide. It is those businesses who are at risk of drifting into ‘construction’ without understanding that there are special rules to operate.
A recent case dealt with a landscape gardener whose normal work was outside of the scope of the CIS. While laying out a garden at a hotel he was asked to assist with the laying of paths and, as he had no experience of laying concrete, hired an experienced subcontractor to help.
The work he asked the subcontractor to do was within the scope of the scheme and HMRC argued that CIS should have been deducted from payments and sought interest and penalties on the under deducted amount, along with penalties for failure to make returns. Similar situations can arise for other businesses on the fringes of construction, for example, tree surgeons.
If HMRC are about to start a CIS compliance review on your business always ask what you may have done wrong. Of course, if you don’t know that an action was wrong then you can’t identify the problem.
That’s where Markel Tax can help. We can review your operation of CIS and identify any problem areas and advise on how to deal with them. If HMRC are about to visit then a disclosure of any errors will allow a reduction in penalties. We may even be able to find the argument that forces HMRC to agree that your view was correct.
If you would like to speak to us about this or any other CIS concerns please contact Paul Mason on 0345 066 0035 or 01788 702772 or email us at CIS@markel.com
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