CISR72100 - Deductions: credit and repayment: newly registered subcontractor has a deduction made at the higher rate
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General
Before making a first payment to a subcontractor, the contractor must contact HMRC to confirm that the subcontractor has registered and to obtain details of their tax payment status. This process is known as verification. See CISR51010 for further guidance.
Where HMRC are unable to verify the subcontractor from the details supplied, the contractor will be instructed to make a deduction at the higher rate from all payments to the subcontractor.
Assuming that this subcontractor is unknown to HMRC, the contractor will also be advised to tell the subcontractor to contact HMRC in order for a CIS record to be set up.
Once the subcontractor has successfully registered with HMRC for CIS, their record will be updated to show a revised tax payment status of either gross or net of deduction at the standard rate. As part of the registration process HMRC will issue a confirmation letter of this to the subcontractor on form CIS313.
Notification of revised tax payment status
At the same time, a form CIS316(B), notification of tax treatment change for a subcontractor who was originally ‘unmatched’, will be issued to the contractor where this has been specifically requested by the subcontractor. In addition to advising of the revised tax payment status to be applied, the CIS316(B) advises the contractor not to refund any deductions already made from the subcontractor at the ‘unmatched’ rate of deduction.
Revised tax payment status for part of a month
The revised tax payment status will apply to all future payments made to the subcontractor, after the date the contractor re-verifies the subcontractor or receives the form CIS316(B). This will lead to cases where
- the revised tax payment status is valid for only a part of the first tax month in which the payment status changes
- multiple payments could have been made within that same tax month, both before and after the date of the revised tax payment status
Repayment of excess deductions
The subcontractor may make a claim to HMRC for repayment of the excess deductions made from payments received prior to the date of the CIS313. They should be advised
- that if they are an individual or a partner these higher rate deductions will be set against their eventual tax and Class 4 National Insurance liability for the accounting period in which the deductions were made once their SA Return has been submitted.
- that if they are a company these higher rate deductions should be off-set against the PAYE/NIC’s/CIS they are due to pay to HMRC each month or quarter in respect of their own employees or subcontractors.
- only excessive deductions made after the issue of the CIS313 are eligible for immediate repayment and only if all of the following conditions are met
- the subcontractor was already entitled to be paid gross, or at the standard rate of deduction, at the time the excess deductions were made,
- the subcontractor must submit the relevant Payment and Deduction Statements (PDS) covering these excess deductions. Where the revised tax payment status applies for only a part of the first month you should establish the dates of payment to ensure they were received after the issue of CIS313.
- the corresponding monthly return from the contractor must have been submitted to HMRC. (Depending on the date the deduction was made, the return may not be due for up to 6 weeks after this date. In this instance the subcontractor should be advised the claim can not proceed until the return is received)
- the PDS must be checked against the monthly return.
There is no need to wait for determination of the liability for the year or accounting period in which the deduction was made, these claims should be treated with priority.
This is not a formal ‘in-year’ repayment and these rules have no statutory force. It is simply the repayment of excessive deductions from a subcontractor entitled to receive gross payment or, payment net of standard rate of deduction at the time the payment was made.
Checking whether the deduction has been paid over
Generally, you will not normally be able to see the exact amount paid over in respect of a single subcontractor except where that subcontractor is the only one paid under deduction and there are no PAYE employees. You will therefore need to exercise your judgement when determining if any disputed deductions have been paid over.
If the contractor has several subcontractors paid under deduction and you can see that the contractor’s monthly payment has been made for the month in question and it looks more or less like the monthly payments before it, you can reasonably assume that this particular subcontractor’s deductions have been included.
Of course, if you see that the contractor has paid over either nothing or an amount that is less then the disputed deduction then you may not be satisfied that it has been paid over.
However, you should be aware that a contractor that is a company which itself is a subcontractor paid under deduction can offset these deductions against its PAYE/NICs, Student Loans and CIS liabilities. You will therefore need to make a judgement on this basis. If the contractor has not paid over enough to account for the deductions at question, is it a limited company paid under deduction as a subcontractor? If it is, then you may decide in the individual circumstances of this case that the subcontractor’s deductions have been accounted for and you may treat this requirement as being satisfied.