CIS Situation / Query - Advice Needed!

Raging Pineapples · February 2009

Hi alL!

I have a friend (well, he's gonna be related to me in about 6 months, lol) who has had an issue with CIS.

He's a migrant worker from the EU, been here for the last 5 years, and has an NI number. He subsists by doing mainly odd jobs here and there and letting his wife do all the work, so his tax liability is often minimal to non-existant.

Anyway, he did some painting/decorating work for the last 3 months for a friend of his. It was paid cash in hand with no receipts of any kind (as all the reliable businessmen do...).

The boss now seems to have noticed that he shouldn't have paid a non-CIS-registered subby, so he's constantly phoning my friend and demanding that he register with CIS otherwise the boss will 'go to prison' (LOL). He is withholding my friend's last week's pay as leverage.

Queries, etc:

Now, his boss was rather hoping that my friend could simply sign up to be paid gross rather than net, leaving any tax duties to fall on my friend. However, I'm fairly sure this decision is made by HMRC itself, isn't it?

If that's so, then the boss could actually be getting himself into a worse position, as he would then automatically owe 20% extra to the taxman (possibly why he's holding back that final week's pay).

But on the other hand, my friend has earned about 1/10th of the Personal Allowance, meaning he's completely tax-free anyway. So there's an argument for just saying forget CIS for now, declare it under self assessment and hope it's immaterial to them.

Also, does it matter whether the painting work was to a new house or an old house? I'm not sure what his situation was in this regard, but if he was redecorating an existing building then I think there is at least an argument for saying that it isn't construction work but maintenance.

What I'm thinking of suggesting is:

My friend registers with CIS, it'll give him a footing with more reputable companies since none would hire him without.

To get his final week's pay back, we try to broker a deal with the employer for him to work unpaid for one more week. What would have been his pay for this additional week goes to the taxman via the employer. Then all is finally declared via invoices and in addition, it keeps a better relationship between my friend and the boss, in case he should ever have to work for him again (not ideal I know, but in this climate he may yet need to).

What are your thoughts?

JodieR · February 2009

It is the contractor's responsibility to ensure that the CIS scheme is operated correctly and there will be penalties imposed on the contractor if he fails to do so.
The contractor should have asked the subbie for his tax details before payment was made, he then should have verified the subbie with HMRC and be told one of 3 things:-
(a) the subbie can be paid gross (this would not be possible in this situation as only subbies earning over a certain limit (approx £60k i think) and meeting other criterea can apply for this)
(b) The subbie is registered with the CIS scheme and therefore a 20% deduction should be made from the labour element of all payments
(c) The subbie is not registered with the CIS scheme and therefore a 30% deduction should be made from the labour element of all payments

It's obviously in your mate's best interest to register with the scheme, but if he doesn't then he needs to complete a tax return and include the 30% tax deducted from him in the appropriate box, which will all be refunded to him if he doesn't earn over the annual personal allowance. He'll need to get the reference numbers from the contractor to back up his claim.

If the subbie doesn't register with the scheme, the contractor will have to pay £42.86 to HMRC for every £100 he's paid to the subbie (30% of £142.86 is £42.86), so he'll have to work nearly half of what he's already worked in reality if he's going to 'make a deal' to work for the tax due.

The other issue here is whether the work he's doing will fall under CIS or whether, if he's just earning an hourly rate and is under the control of the contractor, he should really be on the payroll and have tax/NI deducted at source. Again, it's up to the contractor to ensure that he's classified workers correctly.

PAMDILL · February 2009

Easiest thing would just be the boss gets your friend's NI number, address etc. phones in to Contractor's helpline gets the verification number for 'not found'. Then processes the payments made as of today's date including the week's money held deducts tax and the 2 of them sort out the difference.

Your friend then issues an invoice for the amount, gets his subcontractor monthly statement and contacts HMRC for a refund.

Raging Pineapples · February 2009

What about the issue of construction vs maintenance? I have a strong feeling that he has simply been re-painting an existing building, which I would imagine shouldn't be CISable?

PAMDILL · February 2009

If the person or company he was doing the work for is a contractor and the building was being renovated or built then they will still argue it is CIS.

If it is a building they use or rent out then probably not CIS.

JodieR · February 2009

The CIS scheme covers more than just building a building from scratch and painting usually does fall within the scope of CIS. Have a look here: http://www.hmrc.gov.uk/cis/decide-if-cis.htm#1

groundy · February 2009

As mentioned previously the onus is on the contractor to get it right and he could be looking at substantial penalties if he has not registered as a contractor but proceeding in paying a subcontractor.

With regards to whether it falls into CIS, I'm pretty sure the answer is yes. The following is a list of activities included or excluded from CIS:

http://www.hmrc.gov.uk/new-cis/cis348.pdf

Poodle · February 2009

Hi

Painting and decorating work to the internal or external services of any building or structure that your friend carries out through a contractor falls within CIS.

Even if the work is provided to a private householder it is the fact that he is working through the contractor that establishes this.

Poodle

K H · February 2009

I think you may be over complicating this.

Firstly, is his employer a Contractor within the Construction Industry? or a 'deemed contractor' (someone who spends over £1 million pounds on construction work),such as a property investment company.

If the employer is a contractor or deemed contractor and doesn't have the correct authorisation from hmrc then his employer has to deduct 30% tax, either way the employer has to provide him with a monthly certificate of tax deducted.

Apart from all this, whether his employer is a Contractor or a deemed Contractor if the 'employee' was working for him
for a period of months then he is an employee and subject to tax and ni and certainly not self-employed and his employer should be reminded of this and that gross payments made to him would be treated as net by hmrc.

K H

Raging Pineapples · February 2009

Well his work was sporadic, a full week one month, maybe a few full weeks, some days, it all depends.

But anyway, what's the plan then?

The boss has paid £640 and retained £240 until this is sorted. So total pay would be £880.

a) Worker signs up for CIS, and employer deducts 20% and gives back the balance outstanding after tax of £64. Invoiced up nicely.
b) Worker signs up for CIS but since he was technically paid before signing up, the work is taxed at 30% and the worker hands back £24 to the contractor to cover the tax. Invoiced up nicely.

What do we do?

K H · February 2009

Go for option B, and the tax deducted can be recovered at Y/E but he must insist on proper CIS tax certificate.

K H

CIS Situation / Query - Advice Needed!

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