DMBM405970 - Interest: Interest Review Unit (IRU): PAYE and National Insurance Contributions: Construction Industry Scheme (CIS)
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Setting off company deductions
Setting off individual sub-contractor deductions
Delay in setting up a sub-contractor scheme
Delay in sending a Tax Certificate
Background
Businesses or individuals operating in the construction industry are known as contractors or subcontractors. Contractors are responsible for making deductions of tax from payments made to subcontractors working in the UK construction industry. They need to account for these deductions using the CIS scheme. Deductions made under the CIS scheme are separate from PAYE but are linked to the PAYE system for collection purposes.
The scheme is split into two parts; Pre 6 April 2007 and post 6 April 2007.
Pre 6 April 2007
Where a subcontractor has been approved by us to pay tax directly to us, a Tax Certificate is sent to the subcontractor. This allows them to receive payments from the contractor in full without the deduction of tax.
Where the subcontractor has not been approved by us the contractor needs to deduct tax from the payments they make to the subcontractor. The contractor then accounts for the tax deductions against a CIS scheme. Although deducted by the contractor the tax is that of the subcontractor. So tax accounted for in this manner is available to the subcontractor to set-off against other tax bills that they may have.
Setting off company deductions
The legislation requires that a company that is also a subcontractor must have the tax deductions set-off against their other tax bills in a particular way.
Before 6 April 2002
CIS deductions made from their income as subcontractors would be set-off against the Corporation Tax payable by the company. Only if there is an excess of CIS deduction over and above the CT liability, could a set-off be made against the company's PAYE liability.
From 6 April 2002
CIS deductions made from their income as subcontractors, would be set-off against the PAYE and CIS bill due for the same tax month as an employer or contractor. Where the Company’s own CIS deductions are greater than the payments due in a tax month, they can set the excess against any future PAYE, NIC or CIS bill in the same tax year.
At the end of the tax year, after the returns are received, any excess CIS deductions that cannot be used in settlement of the PAYE or CIS liability may be refunded or set-off against other amounts due.
When considering an objection that involves a company set-off, check that the proper rules have been followed. Where it is found that an incorrect Effective Date of Payment (EDP) has been used for the set off, ask for this to be changed and the interest be recalculated. Where this is not possible, theoretically recalculate and give up the excess interest.
Setting off individual subcontractor deductions
An individual subcontractor will account for his tax by Self Assessment (SA), claiming credit for the tax deducted by the contractor at source. The individual can ask for any excess CIS credit to be set-off against any PAYE, NIC or CIS due from him as an employer or contractor.
This can usually only be done after the end of the tax year in which the deductions were made and after HMRC receive the individual’s SA tax return. However, he may also be entitled to have deductions repaid in-year once the accounting period, which determines the profit for the year, has ended. This is subject to certain conditions being met under the law (see SAM 40040 for more detail).
When considering an objection that involves a set off, check that the correct rules have been followed. The Effective Date of Payment (EDP) of the set-off is usually the date HMRC receive the SA Return, or in the case of in-year repayment, the form CIS40 or 41. Where an incorrect EDP has been used, arrange for this to be changed and the interest changed. Where this can’t be done recalculate and give up the excess interest.
There is no automatic link between the two different tax systems. HMRC has power to set-off amounts to be repaid to a person against debts owed to us by that person (see DMBM405100). So if we know about the debt before making repayment, we can do the set off. Otherwise the taxpayer needs to ask for a set off.
Where the taxpayer objects to paying interest because they claim that their CIS deductions made from their income as a subcontractor should have been used against PAYE, NIC and CIS due as an employer or contractor, consider if
- we knew about the debt or
- a set-off was asked for and
- was there any contact between the taxpayer and HMRC about the deductions.
If we do not know about the debt and the taxpayer does not ask, then it is not HMRC error.
If the evidence shows that a set off should have been made but a repayment was sent instead, consider giving up interest in line with the guidance at DMBM405010. Otherwise the interest charge should be upheld.
Delay in setting up a sub-contractor scheme
The time taken to set up a sub-contractor scheme should normally have no affect on the taxpayer's ability to pay the tax when it becomes due.
When an objection to interest is received claiming that there was a delay in opening a sub-contractor scheme, consider the following
- the date the contractor contacted HMRC to ask for a scheme be opened;
- what information or advice was given or sent to the contractor; and
- what actions HMRC took to open the scheme.
Where it is evident that HMRC caused unreasonable delay in opening a scheme, consider giving up interest in line with the guidance given at DMBM405010.
Delay in sending a Tax Certificate
Any delay in sending a Tax Certificate to a subcontractor should have no affect on an interest charge. The contractor should continue to deduct payments of tax from the subcontractor until the Tax Certificate is sent.
The interest charge should be upheld.
Post 6 April 2007
The main difference from the old scheme is that subcontractors will no longer be issued with a ‘Tax Certificate’ to exempt them from having deductions made and the ‘Tax vouchers’ issued to a subcontractor when deductions have been made.
In this scheme the subcontractor needs to register with HMRC and, if they pass certain test criteria they will be registered to receive payment ‘gross’. If they do not pass the tests they will be registered to receive payment’ net of tax’. If not registered at all then payment is ‘net of tax’ but the rate of deduction is greater.
For the purposes of considering any interest objection the rules are then the same as pre 6 April 2007. A company that suffers deductions can set off, in year, against their PAYE/CIS records and any excess at the year end against other duty, normally the CT for the company. An individual cannot set off in year and at the year end needs to submit their personal SA return and ask for any overpayment to be set-off. See the relevant sections contained in the pre 6 April 2007 guidance.
As there is no longer any subcontractor scheme or tax certificate there cannot be any consideration of delay in setting up or sending the certificate.