CIS: It’s a material world!

As Madonna sings, “We are living in a material world”…and HMRC have decided that focussing on materials (in the CIS sense!) may well be a lucrative avenue of tax revenues for them. So CIS contractors beware…

Those who operate CIS as contractors and pay their subcontractors will be well aware of the rules on labour and materials. Where payments are made to subcontractors which include amounts for materials incurred by the subcontractor, there is no requirement for a deduction to be made on the materials element of the payment. Until now, HMRC has accepted apportionments and only imposed a requirement for the contractor to be satisfied that the amount included as material expenses was a ‘fair estimate of the actual cost of materials’.

13312615_mThe legislation has not changed, neither has HMRC’s guidance. However, as sometimes happens, HMRC have changed the goalposts and what we thought was acceptable practice now appears not to be so. This is because HMRC took and won the case of Flemming & Son Construction (West Midlands) Ltd v HMRC, which hinged on the CIS treatment of materials. In that case, HMRC stated that the legislation requires a contractor to make deductions from payment amounts not shown to represent the direct cost of materials incurred by the subcontractor (i.e. that the amount shown to represent the direct cost for materials should be excluded). They argued that to “show” this increases a contractor’s burden of proof and that being “reasonably satisfied” is not good enough. The Tribunal agreed and HMRC appear to have taken this win as carte blanche to interpret the CIS legislation as saying that the contractors needs actual proof that an expense is not overstated and reflects the direct cost incurred by the subcontractor.

We are seeing a lot more CIS enquiries lately which are particularly focussing on materials, and rightly or wrongly HMRC are placing the onus on the contractor to prove the materials position. So no longer is it good enough to take your subbies at their word (unless of course they are being paid gross in which case you can breathe a sigh of relief and ignore this article!) HMRC will now expect a contractor to “show” that the amount paid for materials is correct to satisfy this “new” requirement. Knowing as we do that HMRC doesn’t always live in the real commercial world, you can expect HMRC to want a higher burden of proof than the ordinary business owner would consider necessary commercially. Therefore you will need to ask your subbies for receipts or invoices and/or do some benchmarking of costs against prevailing trade materials costs to demonstrate to HMRC that you are not allowing your subbies to charge a mark up which is not subject to the CIS deduction rules.

Beware, if you are cannot show that you satisfy this requirement to HMRC’s satisfaction, then HMRC will chase after you as the contractor. And of course many contractors are themselves subbies for someone else and failing to comply with these regulations as a contractor means that you are under threat of having your subcontractor gross payment status rescinded.

Changing the goalposts indeed…..

If you have any queries about the above please contact Dean Johnston or Kathryn Brown on 01228 530913.

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