CIS in a muddle
\nDAVID KIRK reflects on the quirks of the construction industry scheme
\nKEY POINTS
\n\uf0b7 The CIS operates well in the main. \uf0b7 Recovering deductions already paid by the subcontractor. \uf0b7 Condition B of regulation 9 of the CIS Regulations. \uf0b7 Allocation of CIS deductions against other taxes.
\nThere are some in HMRC who have the curious idea that not everyone who works in the construction industry is totally honest.
\nDon\u2019t ask why, but whatever the reason, it means that construction companies are singled out for special treatment when it comes to tax.
\nThe 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%.
\nThe idea is that the tax is allocated against the recipient\u2019s tax bill, so that HMRC are guaranteed a large portion of the construction worker\u2019s tax due, whatever his nefarious intentions.
\nThe 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.
\nThis is usually an indication that a piece of legislation has been well thought-out, which by and large it is.
\nNot perfect
\nThere are, nevertheless, gaps, some of which were exposed by the recent First-tier Tribunal case of Hoskins (TC1972).
\nMr Hoskins used a subcontractor, Mr Fletcher, whom he paid without deducting CIS tax, and appealed against assessments totalling \u00a31,879 on the basis that Mr Fletcher had paid his income tax.
\nMr 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.
\n2
\nHMRC 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.
\nIt is worthwhile dwelling on regulation 9, as this lacuna can give rise to some important tactical considerations when contesting a CIS challenge.
\nThe regulation permits HMRC to direct that a contractor need not pay CIS in two circumstances where it is, strictly speaking, due.
\nCondition 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.
\nIt is curious that the taxpayer can appeal to the tribunal against HMRC\u2019s refusal to give a direction under condition A, but not under condition B (see Regulation 9(3) and (4)).
\nMr 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.
\nThey 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.
\nREGULATION 9(3) and (4)
\n\u201c9(3) Condition A is that the contractor satisfies an officer of Revenue & Customs \u2013 (a) that he took reasonable care to comply with section 61 of the Act [Finance Act 2004] and these regulations, and (b) that \u2013 (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. \u201c9(4) Condition B is that \u2013 (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 \u2013 (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).\u201d<\/p>\n
Allocation of CIS deductions CIS in a muddle DAVID KIRK reflects on the quirks of the construction industry scheme KEY POINTS \uf0b7 The CIS operates well in the main. \uf0b7 Recovering deductions already paid by the subcontractor. \uf0b7 Condition B of regulation 9 of the CIS Regulations. \uf0b7 Allocation of CIS deductions against other taxes. There are some in […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/405"}],"collection":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=405"}],"version-history":[{"count":1,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/405\/revisions"}],"predecessor-version":[{"id":406,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/405\/revisions\/406"}],"wp:attachment":[{"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=405"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=405"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/david-kirk.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=405"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nThe 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).
\n3
\nThis 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.
\nIf 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.
\nIf the subcontractor is a company, regulation 56 specifies the order in which the CIS money is used to pay the company\u2019s liabilities: employees\u2019 National Insurance, employer\u2019s National Insurance, PAYE, student loan repayments, CIS payments on the company\u2019s own subcontractors, corporation tax, with provision in the regulations for repayment of any excess deduction.
\nOne can perhaps see a further anomaly here, concerning companies. If the CIS money is used towards the subcontractor\u2019s 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?
\nIt surely ought to be simple to establish whether HMRC have lost any money (with co-operation from the subcontractor).
\nIf the subcontractor\u2019s PAYE liabilities for the period exceed the CIS deductions that the contractor was due to pay, then no tax is lost.
\nIf 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.
\nIt makes little sense for HMRC to be able to let the contractor off the hook when the subcontractor has, for example, filed and paid \u00a350,000 in corporation tax, but not when it has filed and paid \u00a3750,000 in PAYE and National Insurance, when the first allocation of the CIS money is towards its PAYE\/National Insurance liabilities.
\nThis whole attitude fits ill with the acceptance in HMRC\u2019s Construction Industry Scheme Reform Manual at paragraph 83050:
\n\u201cThe 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.
\n\u201cIt 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 \u2018double taxation\u2019 relief.\u201d
\nTiming
\nThere 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?
\nOnce a determination is issued under regulation 12 that CIS deductions are due, the taxpayer\u2019s right to request a regulation 9 direction that it need not be paid expires.
\nRecently 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 \u2013 no.
\n4
\nOver 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.
\nSuspecting 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.
\nWhat should be done, given there was no right of appeal?
\nThe solution was simple: we made another batch of requests, and, surprise, surprise, this time the answers were more positive.
\nWhat this meant was that it was important to spin the correspondence out long enough for the subcontractors to file their returns.
\nThis 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.
\nOtherwise, the long-winded procedure of a judicial review is bound to be engaged by somebody who feels hard done by.
\nCategories:\u00a0 Taxation of Employees [1] Business [2] Income Tax [3] Tax Topic Tags:\u00a0 Comment & Analysis [4]
\nSource URL: http:\/\/www.taxation.co.uk\/taxation\/Articles\/2012\/10\/03\/47761\/cis-muddle<\/a>
\nLinks: [1] http:\/\/www.taxation.co.uk\/taxation\/category\/income-tax\/taxation-employees<\/a> [2] http:\/\/www.taxation.co.uk\/taxation\/category\/business<\/a> [3] http:\/\/www.taxation.co.uk\/taxation\/category\/income-tax<\/a> [4] http:\/\/www.taxation.co.uk\/taxation\/category\/content-type\/comment-analysis<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"