There are two dangers here:
- Being sent a tax bill, when you have already paid CIS tax by deduction from your income, and
- Being both a contractor and a subcontractor where CIS deduction applies to both your own income and the wages you pay out
1 ) Being sent a tax bill, when you have already paid CIS tax by deduction from your income
If you do not send your self assessment tax return in before the 31 January deadline, HMRC can estimate your tax bill. But you will not be given credit for any tax deducted under the CIS scheme until you send in a tax return. This means that you can face recovery action for tax that has, in effect, already been paid. The solution is to submit your tax return on time, and put the CIS tax deducted in the correct box. If you are unsure what to do, don’t guess. Take advice from HMRC or a tax adviser in practice, or if you are on low income, you may contact TaxAid for advice.
2) Being both a contractor and a subcontractor
If you both subcontract to someone else and have subcontractors working for you, this can cause cash flow problems. Unless you are registered to receive gross payment, the contractor you work for will withhold 20% tax from your money. You in turn will need to withhold 20% in tax from your subcontractor and pay this to HMRC .
For example: Mick receives £60,000 from the main contractor, from which £12,000 has been withheld and paid to HMRC. If Mick then pays £32,000 (net) to his subcontractors, he will be required to pay another £8,000 to HMRC, as CIS tax. Ignoring any other expenses, Mick’s profit is £20,000 (£60,000 income less £40,000 for subcontractors and CIS tax).
But Mick didn’t receive all of the £60,000 – HMRC hold £12,000 which was deducted before being paid to him. So in cash term, Mick has received only £48,0000 (£60,000 – £12,000 CIS tax withheld), but he has paid out £40,000 (£32,000 to his subcontractors and £8,000 to HMRC as CIS tax) . Therefore Mick will only have actually received £8,000 in cash for his work.
He will have to wait until after the end of the tax year and complete his tax return before he can receive the rest of his money as a tax refund of about £8,500.
If you find yourself in this situation, it may be possible to have your subcontractors engaged and paid directly by your contractor. You would only therefore suffer withholding on your part of the monies. Alternatively, some larger contractors may be able to register with HMRC to receive their income under CIS without any tax deduction.