CIS in a muddle
CIS in a muddle
DAVID KIRK reflects on the quirks of the construction industry scheme
KEY POINTS
The CIS operates well in the main. Recovering deductions already paid by the subcontractor. Condition B of regulation 9 of the CIS Regulations. Allocation of CIS deductions against other taxes.
There are some in HMRC who have the curious idea that not everyone who works in the construction industry is totally honest.
Don’t ask why, but whatever the reason, it means that construction companies are singled out for special treatment when it comes to tax.
The result is the construction industry scheme (CIS). Under this scheme, in most circumstances, anyone paying for construction labour, unless operating PAYE, will have to deduct tax at 20% or 30%.
The idea is that the tax is allocated against the recipient’s tax bill, so that HMRC are guaranteed a large portion of the construction worker’s tax due, whatever his nefarious intentions.
The scheme, in some guise or other, has existed for several decades, and it is good to note that relatively few cases concerning its operation have ended up in the tribunals.
This is usually an indication that a piece of legislation has been well thought-out, which by and large it is.
Not perfect
There are, nevertheless, gaps, some of which were exposed by the recent First-tier Tribunal case of Hoskins (TC1972).
Mr Hoskins used a subcontractor, Mr Fletcher, whom he paid without deducting CIS tax, and appealed against assessments totalling £1,879 on the basis that Mr Fletcher had paid his income tax.
Mr Hoskins had asked HMRC to issue a determination under regulation 9 of the Income Tax (Construction Industry Scheme) Regulations (SI 2005/2045) that he need not pay the CIS tax for this reason.
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HMRC had refused to do this, and he appealed. The tribunal said that it did not have jurisdiction to hear the appeal: a judicial review would be necessary.
It is worthwhile dwelling on regulation 9, as this lacuna can give rise to some important tactical considerations when contesting a CIS challenge.
The regulation permits HMRC to direct that a contractor need not pay CIS in two circumstances where it is, strictly speaking, due.
Condition A is a commonsense discretion given to HMRC when people are trying their best, similar to the one in PAYE Regulations (SI 2003/2682) regulation 72.
It is curious that the taxpayer can appeal to the tribunal against HMRC’s refusal to give a direction under condition A, but not under condition B (see Regulation 9(3) and (4)).
Mr Hoskins had appealed under condition A as well as condition B and failed. The tribunal judges noted that he had been a subcontractor in the past and knew of CIS because he had had tax deducted from his own pay.
They said he should therefore have considered the matter further before paying Mr Fletcher gross, and had not taken reasonable care to comply with the regulations.
REGULATION 9(3) and (4)
“9(3) Condition A is that the contractor satisfies an officer of Revenue & Customs – (a) that he took reasonable care to comply with section 61 of the Act [Finance Act 2004] and these regulations, and (b) that – (i) the failure to deduct the excess [i.e. the amount not deducted when it should have been] was due to an error made in good faith, or (ii) he held a genuine belief that s 61 of the Act did not apply to the payment. “9(4) Condition B is that – (a) an officer of Revenue & Customs is satisfied that the person to whom the contractor made the contract payments to which section 61 of the Act applies either – (i) was not chargeable to income tax or corporation tax in respect of those payments, or (ii) has made a return of his income or profits in accordance with TMA 1970, s 8 (personal return) or FA 1998, Sch 18 para 3 (company tax return), in which those payments were taken into account, and paid the income tax and Class 4 contributions due or corporation tax due in respect of such income or profits; and (b) the contractor requests that the Commissioners for HMRC make a direction under paragraph (5).”
Allocation of CIS deductions
The lack of a right of appeal on condition B is not the only anomaly. What the condition essentially says is that where the subcontractor has declared and paid income tax or corporation tax on the receipt, HMRC can disapply the requirement to pay tax under CIS (although their policy is still to charge penalties).
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This seems fair enough as CIS is not a tax in itself: it is intended as a mechanism for collecting those other taxes. Finance Act 2004, s 62 specifies what happens to a subcontractor who has had CIS payments deducted.
If an individual, the deductions go towards his income tax bill, and then towards Class 4 National Insurance; any excess payment can be repaid under TMA 1970, s 59B.
If the subcontractor is a company, regulation 56 specifies the order in which the CIS money is used to pay the company’s liabilities: employees’ National Insurance, employer’s National Insurance, PAYE, student loan repayments, CIS payments on the company’s own subcontractors, corporation tax, with provision in the regulations for repayment of any excess deduction.
One can perhaps see a further anomaly here, concerning companies. If the CIS money is used towards the subcontractor’s PAYE and National Insurance liabilities, why can the contractor not get a declaration that condition B is fulfilled and no further money needs to be paid?
It surely ought to be simple to establish whether HMRC have lost any money (with co-operation from the subcontractor).
If the subcontractor’s PAYE liabilities for the period exceed the CIS deductions that the contractor was due to pay, then no tax is lost.
If the subcontractor is an employment agency, or an umbrella company, or a largish construction company, then its PAYE liabilities are likely to dwarf its corporation tax liability by a considerable margin.
It makes little sense for HMRC to be able to let the contractor off the hook when the subcontractor has, for example, filed and paid £50,000 in corporation tax, but not when it has filed and paid £750,000 in PAYE and National Insurance, when the first allocation of the CIS money is towards its PAYE/National Insurance liabilities.
This whole attitude fits ill with the acceptance in HMRC’s Construction Industry Scheme Reform Manual at paragraph 83050:
“The purpose of directions under regulation 9(5) is to avoid the situation where HMRC pursues a contractor for a deduction that should have been made where the subcontractor has no liability, or has already met any tax liability, on the sum paid gross.
“It follows the principle that HMRC should not recover more tax from both contractor and subcontractor than is correctly payable by the subcontractor. That is why the relief is sometimes known as ‘double taxation’ relief.”
Timing
There is yet another anomaly, and it concerns timing. What happens if HMRC issue a determination that CIS deductions are due, before the subcontractor is due to pay and file its corporation tax?
Once a determination is issued under regulation 12 that CIS deductions are due, the taxpayer’s right to request a regulation 9 direction that it need not be paid expires.
Recently I had occasion to be concerned about this, having made requests for regulation 9 (condition B) directions in respect of a number of subcontractors, and the answers came back – no.
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Over the next couple of months I looked at the Companies House records for these subcontractors and saw that a number of them had filed accounts there since HMRC had looked into the matter.
Suspecting that corporation tax returns would have been filed and tax paid at the same time, it occurred to me that had the requests been made at this later point they might have got different results.
What should be done, given there was no right of appeal?
The solution was simple: we made another batch of requests, and, surprise, surprise, this time the answers were more positive.
What this meant was that it was important to spin the correspondence out long enough for the subcontractors to file their returns.
This is not really a very constructive way of engaging with HMRC, and it is to be hoped that they will address these anomalies before too long.
Otherwise, the long-winded procedure of a judicial review is bound to be engaged by somebody who feels hard done by.
Categories: Taxation of Employees [1] Business [2] Income Tax [3] Tax Topic Tags: Comment & Analysis [4]
Source URL: http://www.taxation.co.uk/taxation/Articles/2012/10/03/47761/cis-muddle
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Deduction of PAYE from holiday pay
Who is responsible?
A solicitor assists employees in recovering unpaid holiday pay from current or former employers on a no win/no fee basis. He recovers his fee from any payment made
A client of ours is a solicitor and has recently started a new service helping employees claim holiday pay from their employers who, for one reason or another, have failed to make the due holiday payment.
The solicitor charges his clients on a no win/no fee basis. Once his work is completed and any unpaid holiday pay has been recovered from the employer, this is mandated to be paid to his firm under the arrangement he has with his client. The employer therefore pays the solicitor, who takes a percentage fee from the holiday pay.
Is the solicitor obliged to deduct PAYE before he pays the net of commission amount to his client? And, if so, can he first offset his commission?
Does it make any difference if the employee has already left the employment and finally, out of interest, should the employer/former employer deduct PAYE before paying the solicitor the outstanding holiday pay? Naturally, our client is keen not to fall foul of any PAYE obligations.
Readers’ thoughts would be very much appreciated here.
Query 18,255 – Working Man
Reply from David Kirk, author of Employment Status – the Tax Rules
The Income Tax (Pay As You Earn) Regulations SI 2003/ 2682, Reg 21 specifies, “On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these regulations by reference to the employee’s code, if the employer has one for the employee.”
On the face of it, this would indicate that the payment from the employer to the solicitor was not covered, because PAYE would only apply to payments “to an employee”.
However, it probably is covered: the solicitor would normally be the agent of the employee for this purpose, in which case the payment is treated as being made to the employee under the laws of agency.
If the solicitor does receive the pay gross, he is under no obligation to deduct PAYE from the payment. He is not the employer’s agent or intermediary, but the employee’s, and this particular payment therefore does not come within the PAYE regulations.
While the payment is one of PAYE income, and thus a “relevant payment”, it is received by the employee in their capacity as employee and therefore only subject to deduction of PAYE if paid by the employer or someone paying on their behalf. The High Court judgment in R oao Oriel Support Ltd v HMRC [2008] EWHC 1304 (Admin) goes into this in some detail, if somewhat confusingly.
There are some special rules in the PAYE regulations for holiday pay, but these do not apply here. They are aimed at holiday pay funds, and require the payment to be “in exchange for a voucher, stamp or similar document”.
The situation is no different if the employee has left, except that code 0T should be used if the P45 has already been issued, on a week 1/month 1 basis, using the normal payment interval non- cumulatively.
The situation with National Insurance is somewhat simpler: liability arises when earnings are paid “to or for the benefit of an earner” (SSCBA 1992, s 6). This covers the payment to the solicitor. SSCBA 1992, s 7 specifies the employer to be responsible for the employer’s contribution, and SSCBA 1992, Sch 1 para 3 specifies the employer to be responsible for the employee’s contributions.
If the employee has left, then HMRC’s booklet CWG2 says that “for an irregular sum, such as accrued holiday pay” National Insurance should be applied using a weekly earnings period.
Categories: Income Tax [1] Tax Topic Tags: Forum & Feedback [2] [3] [3] [3] [3] [3]
Source URL: http://www.taxation.co.uk/taxation/Articles/2013/09/11/313271/who-responsible
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