Double taxation

There are two dangers here:

1. Being sent a tax bill, when you have already paid CIS tax by deduction from your income, and
2. 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 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 if you are on low income, you may contact TaxAid.

2) Being both a contractor and a subcontractor

If tax is withheld by the contractor when you are paid, and you in turn pay monies to subcontractors, then theoretically speaking the same income has been subject to tax twice – once when you received it and again when you paid the subcontractor.  If a substantial proportion of your income is passed onto subcontractors this can lead to cash flow difficulties.

For example: Mick receives £60,000 from the contractor, against which £12,000 has been withheld and paid to HMRC.  If Mick then pays £40,000 gross to his subcontractors, he will be required to withhold £8,000 and pay this to HMRC.  Ignoring any other expenses, Mick’s profit is £20,000. HMRC hold £12,000 which was deducted from monies before they were paid to him.  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 £9,000.

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.