There are two ways double taxation on your income can happen
- Being sent a tax bill when you have already paid tax from your income
- Being both a contractor and a subcontractor
It’s important to rectify any tax errors as soon as you notice them, utilising the help of HMRC or a tax adviser. If you are on a low income, TaxAid is a charity and we may be able to give you advice on this matter.
Being sent a tax bill when you have already paid tax on your income
If you have already had your tax deducted from your income you could still be sent a tax bill if you do not file your self-assessment tax return on time by 31st January. HMRC can estimate your tax bill and send demands for this bill. This means that you can face recovery action for tax that has effectively already been paid.
To avoid this, you simply need to file your tax return on time and ensure you put the CIS tax deducted in the correct box.
If you are unsure what to do, don’t guess. You can contact HMRC for advice, hire a tax adviser, or if you are on a low income we are a charity who can provide advice to you.
Being both a contractor and a subcontractor
If you subcontract to someone else and also have subcontractors working for you this can cause complications. Unless you are registered to receive gross payment, the contractor you work for will withhold 20% tax from your money and you in turn will need to withhold 20% in tax from your subcontractor to pay to HMRC.
This situation can cause cash flow problems. Below is an example explaining this.
Mick receives £60,000 from the main contractor, of which £12,000 has been withheld as a 20% tax deduction and paid to HMRC. Mick next owes his subcontractors £40,000 and he will be required to withhold 20% of this and pay it to HMRC which is £8,000.
Mick’s profit should be £20,000. £60,000 (paid by his contractor) – £40,000 (the cost to his sub-contractors = £20,000
But in reality, Mick is only paid £48,000 (because 20% tax is deducted at the source £60,000 – £12,000).
He still needs to pay out £40,000 (£32,000 to his subcontractors and £8,000 as 20% to pay to HMRC).
Therefore Mick will only receive £8,000 in cash for his work. He will need to wait until after the end of the tax year to complete his tax return before he receives the rest of his money as a tax refund. His refund will be about £8,500.
If you find yourself in this situation, it is possible to have your subcontractors engaged and paid directly by your contractor.
It is also possible for some larger contractors to register with HMRC to receive their income under CIS without any tax deduction.
