CIS Contractors becoming increasingly under scrutiny from HMRC

Construction companies are being warned by Markel Tax about increased tax checks by HMRC, particularly regarding how they classify workers as self-employed subcontractors or employees.

Misclassifying workers can lead to hefty tax bills, including National Insurance contributions.

Markel Tax highlight that HMRC uses "badges of trade" to determine if someone is genuinely self-employed. These badges include important factors like:

• Personal Service – is the individual obliged to provide the services personally?
• Mutuality of obligations – is the individual under obligation to undertake work and is the contractor obliged to provide work?
• Control – is the individual subject to control as to how they provide services?

If the answer to all three above is “yes” then the individual is an employee for tax purposes in the eyes of the law. If they can answer no to any one of those then the law states they are likely not an employee.

Markel has also issued a warning regarding the CIS Compliance itself which often catches contractors out. It is vital that contractors verify and pay all of their subbies at the correct deduction rate (20% matched, 30% unmatched).

However one of the biggest target areas for HMRC currently is payments of expenses to subcontractors. Only a very few payments can be made by a contractor to their subcontractor without CIS deduction.

• Materials - These can be reimbursed without deduction, however, in order to pay the cost of materials without deduction the contractor must have evidence that the amount submitted for materials is correct and accurate. This means the subcontractor must provide a receipt to the Contractor to show the actual cost incurred by the subcontractor. If, on HMRC inspection, a Contractor cannot produce a receipt for the materials costs paid without deduction then HMRC will hold the Contractor liable to unpaid tax for the whole amount paid without deduction (plus interest, plus penalties).
• Fuel - Only fuel for site equipment can be paid without deduction. Fuel for subcontractors to travel from site to site is not the same and cannot be reimbursed without deduction. Travel cannot be reimbursed without deduction.
• Plant and machinery - If plant is hired in, this is allowed to be reimbursed free from deduction, however if plant is hired along with an operator combined, the whole amount must be subjected to deduction

Getting any of these wrong would not only mean the contractor would be liable for the under deducted CIS tax due to HMRC, but it could also result in severe penalties which could be significantly more than the tax itself.

Internet links: Markel Tax Website