CIS Tax - Confused

[brizospark]

Just wondering if any of you self employed could help sort out my confusion over this one.

i am a sole trader and carry out a lot of work for builders, I am due a payment from a builder who says he will deduct 20% CIS tax, as I am aware of, and registered for.

I don;t understand how this works, firstly what if the case my bill is £1000 and I have spent £500 on materials. My profit is £500 here but I will only receive £800, therefore only actually getting £300 after materials paid and CIS paid. (£1000-20% = £800 - £500 materials = £300) Surely this cant be correct.

Secondly how does this work with self assessment, is it like this? Self assesment comes back that I owe them X amount lets say £5000, but I have already paid, lets say £2000 CIS. Does this automatically get calculated in self assessment as I owe them £300 instead of £5000?

Also, I have accounting software that tracks my bank feed and it is going to prove to be complicated to explain to this that although there is only £800 coming in that I have actually paid the £200 Tax.

Someone put me right with this!

 

[telectrix]

when you do your s/a tax return, the £500 goes down on your expenses as materials supplied. the taxman will then credit you with the 20% you've had deducted. in theory.

 

[Sparkysoldman]

Your just about right but don't forget to get a cis voucher from the builder. You will need to prove to taxman tax was stopped. Otherwise you will end up paying twice

 

[telectrix]

better still would be to get the builder to supply the materials. + is that if he's slow paying, you're only standing out labour. the - is you don't make a profit on the goods.

 

[D Skelton]

CIS payments are on labour ONLY, they do not include material costs! If you charged the builder £1000 and spent £500 on materials, the builder can only deduct from the £500 you have charged him in labour. He will owe you £900 in total after deductions (materials deducted from final invoice, 20% deducted from labour then materials added back on). The materials costs deducted however have to be your actual material costs, so don't include any markup on here. I'll make this clear - Your builder must not apply a blanket 20% deduction if materials costs have been accrued by you!

With regards to self assessment, upon year end when filling in the HMRC form it will ask for any payments made under CIS and automatically deduct that from what you have already paid in tax from your final tax bill, or, if you havent earned much then it will automatically calculate that you are due for a tax refund.

The CIS contractor is legally obliged to provide a statement of deductions at the end of every tax month in which they deduct from a subcontractor, a copy of the portion of this statement showing each individual subcontractors deductions must be given to each subcontractor no later than 14 days from the end of the tax month it refers to. What this means for the subcontractor is that both they and HMRC have proof of deductions made, so that bit about bank account irregularities, should you ever get audited, it is easily worked out, so don't worry.

 

[telectrix]

i didn't know that. i nominate the above post for the most useful of the week.

 

[Richard Burns]

Clear easy and straightforward response there, what can't the HMRC do this?

 

[Cbigfoot]

Adding on to D Skeltons post.

There are three levels of deduction. 30%, 20% and 0%

Before anyone working CIS can pay you they must verify your status with the HMRC. This can be done by telephone or electronically if they have the software for it.
To verify you they will need your UTR (Unique Tax Reference) and possibly also your National insurance number.
One they have verified you the HMRC will tell them what percentage to deduct from you.

Most people who are put on the system for the first time will be 20%, if you have no previous tax payment problems on record.
If you have a poor record for paying your tax on time or you cannot be recognised by the system (your UTR or NI numbers do not match or cannot be found) you may be deducted 30%
to have a 0% cis deduction you have to apply and then jump through certain hoops depending on whether you are limited or sole trader.


In short this is a way to tell if you are being scammed by the builder. If you have not given them your UTR and NI number it is unlikely that they will have been able to verify you. Therefore they should be deducting 30%. If they are saying they will take 20% then it is entirely possibly that they are not declaring it to HMRC and you will then have a fight on your hands to prove they deducted the money from you.

I have a sub contractor who has been fighting for over a year to have his tax bill sorted out because he has no certificates of deduction and it looks like the builder took the 20%.

Beware the CIS! it can be a good tax savings pot, but also its easy to rob and hard to prove!