In the construction industry it’s essential for contractors to deduct the right amount of Construction Industry Scheme (CIS) tax when paying subcontractors.
It’s commonly misunderstood that CIS tax deductions only apply to labour costs. Although it may work out like that in practice, this isn’t the case.
HMRC have very clear instructions; before applying the appropriate rate of CIS tax to the net amount, the contractor must deduct the following costs as listed on the subcontractor’s invoice:
– plant hire
– VAT charged
– CITB levy paid
– fuel used (except for travelling)
– consumable stores
– manufacturing or prefabricating materials.
Unless the contractor convinces HMRC to demand the CIS tax directly from the subcontractor, they remain liable to make the correct deductions.
In a recent case the company directors and internal accountant were criticised by the judge for not reading the CIS regulations and taking care to apply them correctly. We think this is quite harsh as the regulations are difficult to understand. However, it’s important that you make sure that anyone operating your company’s CIS does read HMRC’s online guidance concerning CIS. If you’re unsure about any aspect of the CIS, just give us a call.