My client has had a computation from HMRC for the CIS (Construction Industry Scheme) deductions they failed to deduct from payments made to a subcontractor for the current and last 6 tax years.

What about the tax paid by the subcontractor on this income via Self Assessment/Corporation Tax? Can this be taken into account? 

Section 61 Finance Act 2004 requires contractors to deduct the appropriate amount of CIS from all payments made to subcontractors for work that falls within the scope of the CIS scheme – unless the subcontractor is registered for gross payment status (s60(4)).  Section 62 Finance Act 2004 requires contractor’s to pay over the CIS they have deducted to HMRC.  If HMRC finds that a contractor has failed to make the necessary CIS deductions, they will usually issue a computation to the contractor showing the CIS due and will request their agreement to the figures.

Once HMRC have the contractor’s agreement, they should consider Regulation 9 of The Income Tax (Construction Industry Scheme) Regulations 2005 (SI2005/2045), to see whether directions should be issued under regulation 9(5) that the contractor is not liable to pay all or part of the tax due where either Conditions A or B are met – see CISR17100 and  CISR83000.

HMRC can only consider representations under Regulation 9 before they issue a Regulation 13 direction (see CISR83040 and CISR83000). Therefore it is important that HMRC are asked to consider Regulation 9 if a Regulation 13 “warning letter” is received – see CISR82030.

Condition A is met if the contractor has satisfied HMRC that they had taken reasonable care and that the error was made in good faith or the contractor genuinely believed no s61 deduction was due.

Condition B is met if HMRC are satisfied that the individual or business the contractor made the payments to:

  • was not chargeable to Income Tax or Corporation Tax for these payments, or
  • has made a return of income or profits that includes the payments and has paid the Income Tax and Class 4 National Insurance contributions (NIC) or Corporation Tax for the income or profits, and
  • the contractor has requested HMRC make a direction under regulation 9(5)

An appeal can be lodged against HMRC’s refusal to give a direction under Condition A. However, there is no right of appeal against a refusal to give a direction under Condition B. Therefore, if possible, the contractor should liaise with the subcontractors concerned to obtain all relevant information relating to Condition B and provide this to HMRC before HMRC formally consider Regulation 9. HMRC may still reconsider this after refusing to issue a direction under Condition B “if the contractor immediately supplies you (HMRC) with evidence suggesting that the refusal is not soundly based” – see CISR83060.

In association with Croner Taxwise

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