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If the Contractor Hasn't Paid Your Tax, What Should You Do?

Updated: May 17

 

Understanding the Construction Industry Scheme (CIS) and Your Rights

If you're a subcontractor or contractor in the UK, understanding your tax obligations under the Construction Industry Scheme (CIS) is crucial. However, a common concern arises when contractors fail to pay the tax they've deducted from subcontractors. This article, the first part of a comprehensive guide, focuses on what you should do if you find yourself in this predicament.

 


If the Contractor Hasn't Paid Your Tax, What Should You Do


CIS Basics and Registration

Firstly, let's clarify the CIS basics. The scheme applies to most construction work and involves contractors deducting money from a subcontractor's payments, which is then passed to HM Revenue and Customs (HMRC) as advance payments towards the subcontractor's tax and National Insurance. It's imperative to know whether you are required to register under CIS. If your work is solely for private customers, CIS registration isn't necessary, as these clients are not liable to operate the scheme. However, for others, failing to register means a 30% tax deduction from payments for labor supply​.

 

Actions When Contractors Fail to Make Deductions

When a contractor deducts tax from your payment, they must provide you with a payment advice detailing the pay and tax deducted. These advisories are essential for offsetting your income tax liabilities and should be retained. If you're self-employed, your CIS returns must reflect your self-employment status and CIS registration. It's important to ensure all subcontractors needing verification are confirmed and their employment status considered.

 

In cases where contractors do not make deductions, you have a right to appeal against HMRC’s decision if they refuse to waive payment of the deductions that should have been made. Furthermore, HMRC may assess the amount they believe should have been deducted if there's disagreement over whether a deduction should have been made​​​.

 

Reporting CIS Suffering

CIS suffering is a report that breaks down what the contractor has paid to HMRC, including corresponding deductions. Discrepancies in this report can be reported to HMRC. A standard CIS suffered report will list the contractor(s) and provide a detailed breakdown of the pay records entered​.

 

Understanding Tax Rules for Contractors and Subcontractors

Subcontractors registered for gross payment do not need CIS deductions from payments, but it's crucial to always verify the nominee’s CIS status. For subcontractors registered for net payment, CIS deductions should be 20% of the full payment, minus any deductions for materials. Remember, if the subcontractor is registered for VAT, no deduction is made from the VAT element of invoices. Unmatched subcontractors face a 30% tax rate on labor supply payments​.

 

CIS and IR35 Regulations

As of April 2021, the off-payroll working rules (IR35) changed significantly. For services to medium or large-sized client organizations outside the public sector, the client is now responsible for determining your employment status for tax. If you're deemed an employee for tax purposes under these rules, your client or the agency paying your fees will deduct Income Tax and Employee NICs before payment. It's important to be aware of these changes and how they may impact your tax situation​.

 

Claiming CIS Deductions and Dealing with Discrepancies

The standard time to claim CIS deductions is four years, but certain conditions apply. You must have worked at two or more construction sites with the same company and provided your own transportation or used public transport to these sites. Always remember that you can only claim back within the last four taxation years​.



Navigating CIS Deductions and Compliance

 

CIS Deduction Principles and Contractor Responsibilities

In the UK construction industry, the Construction Industry Scheme (CIS) deduction is a critical process where contractors deduct a percentage from payments to subcontractors, considered as prepayments towards the subcontractor’s tax and national insurance. Understanding who qualifies as a contractor is crucial. Mainstream contractors are directly involved in construction, while deemed contractors are non-construction businesses spending over £3 million on construction operations within a rolling 12-month period. These contractors must verify subcontractors, make CIS deductions, file CIS returns, and pay these deductions to HMRC.

 

Understanding Subcontractor Categories

A subcontractor in CIS is either an individual or a company hired to complete specific construction work. They are not employees of the contractor but must be verified with HMRC to determine their payment status. The verification process is essential for establishing whether a subcontractor is registered with HMRC and their payment status under CIS​.

 

CIS Deduction Rates and Gross Payment Status (GPS)

CIS deductions are set at 20% for registered subcontractors and 30% for unregistered ones. Subcontractors with Gross Payment Status (GPS) do not have deductions made. To qualify for GPS, subcontractors must pass the business, turnover, and compliance tests. For instance, they must operate a business carrying out construction operations through a UK bank account and meet certain turnover requirements. All CIS and direct tax returns and payments must be correctly submitted by the deadlines​​​.

 

Upcoming Reforms in CIS from April 2024

Starting April 2024, there will be significant changes in the CIS. Subcontractors will need to demonstrate compliance with VAT obligations to obtain and maintain GPS. The reforms also include the addition of VAT returns and payments to the compliance test for GPS. HMRC will begin automated annual compliance checks six months after GPS is granted, instead of the current 12 months, to identify non-compliant businesses more quickly. Subcontractors should review their VAT compliance to ensure they don't risk having their GPS withdrawn or application refused post-April 2024​​​.

 

Calculation of CIS Deductions

Calculating CIS deductions involves deducting VAT, materials, plant hire costs, and other allowable deductions from the gross amount of the subcontractor’s invoice. The remaining amount is then multiplied by the CIS deduction rate (20% or 30%) to get the CIS tax amount. For example, if a subcontractor sends an invoice of £49,500 (excluding VAT), with £30,000 for the construction material, and £19,500 for the labor cost. If the subcontractor is VAT and CIS registered at the standard rate, the CIS tax amount is calculated on the labor cost only. So, the CIS deduction would be 20% of £19,500, which amounts to £3,900. This £3,900 is then withheld by the contractor and paid to HMRC as part of the CIS. The subcontractor would receive the remaining balance after this deduction. In this example, after deducting the CIS tax amount, the subcontractor would receive a payment of £45,600 (excluding VAT). It's important to note that the VAT amount, if applicable, is added to the invoice total but is not included in the CIS tax calculation.

 


If You Are a Subcontractor and the Contractor Hasn't Paid Your Tax, What Should You Do in the UK? - A Step by Step Guide

 

Step 1: Understand Your Status in the CIS

As a subcontractor in the UK, your tax dealings are likely governed by the Construction Industry Scheme (CIS). Under CIS, contractors deduct money from your payments and forward it to HMRC as advance payments towards your tax and National Insurance. First, ensure that you are correctly registered in the CIS. If you're not registered, you might be taxed at a higher rate (30%) than the standard (20%)​.

 

Step 2: Confirm Deductions and Payments

Check your payment and deduction statements from the contractor. These should detail the amount of money deducted for tax purposes. If you haven’t received these statements, request them immediately as they are necessary for your tax records and subsequent steps.

 

Step 3: Contact the Contractor

If you suspect that deductions made by the contractor haven’t been paid to HMRC, your first course of action should be to contact the contractor. It's possible there could be a misunderstanding or administrative delay. Clarify the situation and ask for proof of the tax payments.

 

Step 4: Gather Evidence

Collect all relevant documentation, such as contracts, invoices, payment statements, and any correspondence with the contractor. This evidence is crucial if you need to take further action or if HMRC questions your tax filings.

 

Step 5: Contact HMRC

If the contractor fails to provide satisfactory responses or proof of payment, contact HMRC. Explain the situation and provide them with all the evidence you have gathered. HMRC’s CIS helpline can guide you on the next steps. It’s crucial to inform HMRC, as discrepancies in your tax records can lead to complications later on​​​.

 

Step 6: Filing Your Tax Return

When filing your Self Assessment tax return, declare the income you’ve earned and the tax that should have been deducted by the contractor. If you don’t have exact figures (in the absence of deduction statements), use your best estimates and inform HMRC of the situation. Your honesty in this process can be crucial in resolving any discrepancies.

 

Step 7: Keep Track of Correspondence and Responses

Keep a record of all communications with the contractor and HMRC. This includes dates of calls, emails, or letters and summaries of what was discussed or agreed upon. This documentation could be important if there are further disputes or if the situation escalates to a legal matter.

 

Step 8: Consider Seeking Professional Advice

If the amount in question is significant or the situation becomes complex, consider seeking advice from a tax professional or a solicitor. They can offer guidance specific to your situation and may assist in communications with HMRC or legal actions against the contractor.

 

Step 9: Stay Informed About CIS Changes

Stay updated on any changes in the CIS regulations. For instance, from April 2024, there will be significant reforms in the CIS, especially concerning Gross Payment Status and compliance checks. Keeping abreast of these changes can help you in future dealings as a subcontractor​​​.

 

Step 10: Plan for the Future

Finally, consider setting aside a portion of your income for tax purposes, especially if you’re unsure of the contractor’s reliability in making tax payments. This can help alleviate the financial burden if you end up having to pay additional taxes at the end of the tax year. Also, evaluate your working relationship with contractors who have failed in their tax obligations to avoid future issues.

 

In summary, dealing with a situation where a contractor hasn’t paid your tax requires a systematic approach - from understanding your status under CIS, confirming deductions, communicating with the contractor and HMRC, to possibly seeking professional advice. Being proactive, organized, and informed is key to resolving such issues effectively.

 


Filing CIS Returns and Handling Penalties

 

CIS Monthly Returns Filing Process

As a CIS contractor, you are required to file monthly returns to HMRC. This includes declaring payments made to subcontractors. These returns can be filed using HMRC’s CIS online service or through commercial CIS software. It's important to declare the correct employment status for subcontractors, as providing incorrect information can result in penalties of up to £3,000. If no payments were made to subcontractors in a month, you must inform HMRC that no return is due. Failing to make this notification can also attract penalties​​​.

 

Who Needs to Register and Submit CIS Monthly Returns?

Contractors who pay subcontractors for construction work must register for CIS and submit monthly returns. This includes businesses that don’t carry out construction work themselves but spend at least £1 million a year on construction. Subcontractors involved in various construction-related activities, such as site preparation, building work, repairs, and installation of utilities, fall under the CIS regulations.

 

Required Information for CIS Monthly Returns

Monthly returns should include detailed information for each subcontractor paid during the tax month. This includes the subcontractor's name, verification number, cost of materials, gross payment, tax rate, and the amount of tax deducted. The tax rate is typically 20% for registered subcontractors and 30% for unregistered ones. A 0% rate applies to subcontractors with Gross Payment Status​.

 

Deadlines and Penalties for Late CIS Returns

CIS monthly returns must be filed within 14 days after the end of the tax month. For example, a return for the period from May 6th to June 5th must reach HMRC by June 19th. Missing this deadline can result in escalating penalties, starting from £100 for being one day late, increasing to potentially thousands of pounds for more extended delays. It is crucial to maintain a timely filing schedule to avoid these penalties​​​​​.

 

Handling Penalties for Late Filing

If you face penalties for late filing, a contractor tax accountant can assist in managing and potentially appealing against these charges. They can guide you through the appeal process within 30 days of receiving a penalty notice and help you provide a valid reason for the delay, which might lead to the penalty being withdrawn by HMRC.

 

Correcting Errors on Returns

If errors are discovered on your CIS returns, your accountant can help correct them using the HMRC CIS online service. Timely correction of errors can prevent further complications and potential penalties.

 

Maintaining Compliance and Record Keeping

Effective record-keeping is essential for CIS compliance. Your accountant can help ensure that all necessary records are accurately maintained. This includes details of all subcontractors, payments made, deductions withheld, and tax paid to HMRC. Proper records support your case in any disputes or inquiries from HMRC.

 

In summary, contractors in the UK must diligently manage their CIS obligations, including the timely filing of monthly returns and handling of any associated penalties. A contractor tax accountant plays a crucial role in ensuring compliance, handling complex tax matters, and providing valuable guidance to navigate the intricacies of the CIS framework. With their expertise, contractors can minimize the risk of penalties and maintain their focus on their core business activities.



A Hypothetical Real-Life Case Study: A Sub-Contractor Dealing with a Contractor's Unpaid Tax under CIS


Meet David, a highly skilled carpenter working as a sub-contractor in Manchester. David had been providing his services to a reputable construction company, ABC Constructions, for nearly a year. He enjoyed his work and trusted ABC Constructions, as they consistently paid him on time. However, his peace of mind was shattered when he received a notification from HM Revenue & Customs (HMRC) stating that ABC Constructions hadn’t paid the taxes deducted from his earnings under the Construction Industry Scheme (CIS).


Step 1: Understanding the Problem

David's ordeal began with an official letter from HMRC. This letter indicated that ABC Constructions had failed to submit the tax deductions made from his payments under CIS. Under this scheme, contractors are required to deduct 20% from payments to sub-contractors and pass this amount to HMRC, which counts towards the sub-contractor's tax and National Insurance contributions.


Step 2: Verification and Initial Steps

David was shocked and immediately decided to verify the situation. He contacted HMRC to confirm the non-payment. The HMRC representative verified that ABC Constructions had indeed not paid the deducted amounts. David reviewed his CIS statements and realized that a total of £8,000 had been deducted over the past year but not remitted to HMRC.


Step 3: Seeking Professional Advice

Understanding the gravity of the situation, David sought advice from a tax advisor specializing in CIS issues. The advisor explained that if ABC Constructions went bankrupt or refused to pay, David might still be held liable for the taxes already deducted. This could result in significant financial strain, as David would have to pay taxes on income that he technically never received.


Step 4: Legal Recourse

David's tax advisor suggested pursuing legal action against ABC Constructions to resolve the issue. The legal process involved several steps:


  1. Pre-Action Protocol: David’s solicitor sent a formal letter to ABC Constructions, detailing the unpaid tax deductions and demanding payment within 30 days. The letter also stated that failure to comply would result in legal action.

  2. Filing a Claim: When ABC Constructions failed to respond, David proceeded to file a claim in the County Court. The claim included the amount of unpaid taxes (£8,000) plus interest and legal fees, totaling £9,500.

  3. Court Proceedings: During court proceedings, David presented evidence, including his CIS statements, contracts, and correspondence with HMRC. ABC Constructions failed to provide a valid defense.

  4. Judgment: The court ruled in David’s favor, ordering ABC Constructions to pay the outstanding £8,000 to HMRC and compensate David for his legal expenses.


Step 5: Enforcement and Recovery

Despite the court’s ruling, ABC Constructions delayed the payment. David explored enforcement actions to recover the funds:


  1. Warrant of Control: David applied for a Warrant of Control, enabling bailiffs to seize and sell ABC Constructions' assets to cover the unpaid taxes and legal costs.

  2. Third-Party Debt Order: Another option was a Third-Party Debt Order, allowing David to claim the money directly from ABC Constructions' bank accounts.


Step 6: Communicating with HMRC

Throughout this process, David maintained regular communication with HMRC. He updated them on the legal proceedings and provided copies of court documents. HMRC acknowledged David’s efforts and assured him that his tax records would be adjusted once the issue was resolved.


Step 7: Implementing Preventive Measures

David learned several crucial lessons from this experience. To avoid similar issues in the future, he implemented the following preventive measures:


  1. Due Diligence: Before working with new contractors, David started conducting thorough background checks to ensure their financial stability and tax compliance.

  2. Regular Monitoring: He began to regularly monitor his CIS deductions and payments to HMRC, ensuring that all amounts were accurately reported and submitted.


David's case underscores the complexities that sub-contractors can face when contractors fail to meet their CIS tax obligations. Through meticulous verification, professional advice, and legal recourse, David navigated this challenging situation. His experience highlights the importance of vigilance and proactive measures in protecting oneself from financial and legal risks in the construction industry.


Summary of Key Points


  • Verification: Confirm contractor’s tax payments with HMRC.

  • Financial Assessment: Evaluate the financial impact of unpaid taxes.

  • Professional Advice: Seek guidance from a tax advisor.

  • Legal Action: Follow legal procedures to reclaim unpaid taxes.

  • Recovery: Utilize enforcement actions if necessary.

  • Preventive Measures: Conduct due diligence and regularly monitor tax deductions.


David’s experience serves as a cautionary tale for sub-contractors, emphasizing the necessity of awareness and proactive management of tax-related matters.

 


How Can a Contractor Tax Accountant Help You If You Are a Subcontractor and the Contractor Hasn't Paid Your Tax


How Can a Contractor Tax Accountant Help You If You Are a Subcontractor and the Contractor Hasn't Paid Your Tax

Navigating the complexities of the Construction Industry Scheme (CIS) in the UK can be challenging, especially when a contractor fails to pay your tax. This is where a contractor tax accountant becomes invaluable. In this guide, we'll explore how these professionals can assist you if you're a subcontractor facing this issue.

 

Understanding the CIS and Your Position

A contractor tax accountant has in-depth knowledge of the CIS, under which contractors deduct money from your payments and forward it to HMRC as advance tax payments. If these deductions aren't paid to HMRC, it can lead to significant tax complications for you as a subcontractor. The accountant can help you understand your rights and responsibilities under CIS, ensuring that you're compliant with all regulations.

 

1. Assessment of Your Tax Position

The first step a tax accountant will take is to assess your tax position. They will review your contracts, payment receipts, and any deduction statements provided by the contractor to determine how much tax should have been paid on your behalf. This assessment forms the basis of any further action.

 

2. Communicating with the Contractor

An accountant can act as a mediator between you and the contractor. They can professionally approach the contractor to inquire about the missing tax payments, often yielding more effective results due to their expertise and understanding of tax law.

 

3. Liaising with HMRC

If the contractor fails to provide a satisfactory response, your tax accountant can liaise directly with HMRC on your behalf. They can explain the situation, submit any necessary documentation, and ensure that HMRC understands the discrepancy is not due to your negligence.

 

4. Filing Adjustments and Claims

In cases where tax payments have been missed, your tax return will need to be adjusted accordingly. A tax accountant can accurately file these adjustments, ensuring that your tax liabilities are correctly reflected. They can also help in claiming any refunds or credits that you may be entitled to due to overpayment or mismanagement of funds by the contractor.

 

5. Representing You in Disputes

Should the situation escalate, a tax accountant can represent your interests, whether in discussions with HMRC or legal disputes with the contractor. Their expertise can be crucial in navigating complex tax laws and dispute resolution processes.

 

6. Providing Documentation and Evidence

Your accountant can help gather and organize all necessary documentation and evidence required to support your case. This includes contracts, payment statements, correspondence with the contractor, and any other relevant financial records.

 

7. Advising on Legal Recourse

In instances where the contractor has acted illegally or unethically, your accountant can advise on the appropriate legal recourse. This might include taking legal action against the contractor for recovery of unpaid taxes or for breach of contract.

 

8. Preventative Measures for Future Contracts

A tax accountant can also advise you on preventative measures for future contracts. This might include guidance on vetting contractors, understanding the terms of contracts, and setting up more secure payment arrangements to ensure that tax deductions are handled correctly.

 

9. Staying Informed About CIS Changes

Tax laws and regulations, including those under the CIS, are subject to change. A contractor tax accountant stays updated on these changes, such as the upcoming reforms in April 2024, and can advise you on how these might affect your future work and tax obligations​​​.

 

10. Financial Planning and Advice

Beyond immediate tax issues, a tax accountant can provide broader financial planning advice. This could include strategies for saving, investing, or planning for tax liabilities, ensuring you're financially prepared for any similar situations in the future.

 

A contractor tax accountant is an essential ally for subcontractors in the UK facing issues with contractors not paying their tax. Their expertise in CIS, tax law, and accounting ensures that you can navigate this complex situation effectively, safeguard your financial interests, and maintain compliance with tax regulations. With their assistance, you can focus on your work, knowing that your financial and tax matters are in capable hands.

 

 FAQs


Q1: What should I do if my contractor hasn't paid the tax deducted under CIS?

A: Immediately contact HM Revenue & Customs (HMRC) to report the non-payment and verify the details. Make sure you have all your CIS statements and contracts ready for review.


Q2: Can I be held liable for unpaid taxes if my contractor fails to pay HMRC?

A: Yes, if the contractor fails to pay, you might still be liable for the unpaid taxes. HMRC can hold you responsible for the taxes on the income already deducted.


Q3: How can I verify if my contractor has paid the deducted taxes?

A: Contact HMRC directly and check your CIS statements for any discrepancies to confirm if the contractor has paid the taxes.


Q4: What evidence should I gather before taking legal action against my contractor?

A: Gather all CIS statements, contracts, correspondence with HMRC, and any communications with the contractor regarding deductions and payments.


Q5: What legal steps can I take if my contractor refuses to pay the deducted taxes?

A: Start with a pre-action protocol letter demanding payment within 30 days, followed by filing a claim in the County Court if there is no response.


Q6: How can I protect myself from future issues with contractors not paying taxes?

A: Conduct thorough due diligence on contractors, regularly monitor your CIS deductions, and maintain clear records of all transactions and communications.


Q7: What is a Warrant of Control, and how does it help in recovering unpaid taxes?

A: A Warrant of Control allows bailiffs to seize and sell the contractor's assets to cover unpaid taxes and legal costs.


Q8: What is a Third-Party Debt Order, and when should I consider it?

A: A Third-Party Debt Order allows you to claim the money directly from the contractor's bank accounts. Consider it if the contractor delays payment even after a court ruling.


Q9: Can HMRC adjust my tax records if the contractor fails to pay the deducted amounts?

A: Yes, HMRC can adjust your tax records once the issue is resolved. Keep them informed throughout the legal process.


Q10: What are the potential consequences for the contractor who hasn't paid the taxes?

A: The contractor may face legal penalties, fines, and interest charges. They might also be subject to enforcement actions like asset seizure.


Q11: How does the CIS affect my tax obligations as a subcontractor?

A: The CIS requires contractors to deduct 20% from your payments as advance tax. If not paid by the contractor, you might be responsible for the tax amount.


Q12: Can I claim back overpaid tax under CIS?

A: Yes, if you have overpaid due to CIS deductions, you can claim a refund from HMRC. Keep accurate records of payments and deductions.


Q13: What should I include in a pre-action protocol letter to my contractor?

A: Detail the unpaid tax amounts, demand payment within 30 days, and warn of impending legal action if the matter is not resolved.


Q14: How long does it take to resolve a CIS tax dispute through legal action?

A: The time frame varies but can take several months, depending on the complexity of the case and the court’s schedule.


Q15: What are the costs associated with taking legal action against a contractor?

A: Costs include court fees, solicitor fees, and potential enforcement costs. These can be claimed back if you win the case.


Q16: Can I negotiate a settlement with my contractor outside of court?

A: Yes, it’s often advisable to attempt a settlement through negotiation or mediation to avoid lengthy court proceedings.


Q17: How does unpaid CIS tax affect my annual self-assessment tax return?

A: You must report all income and deductions. Unpaid CIS tax could mean you owe additional taxes, which must be declared in your return.


Q18: What should I do if the contractor becomes insolvent?

A: Contact HMRC immediately and seek legal advice. You might still be held liable for the unpaid taxes despite the contractor’s insolvency.


Q19: Can I change contractors if my current contractor hasn't paid the CIS tax?

A: Yes, but ensure the new contractor is compliant with CIS regulations and conduct due diligence before entering into a new agreement.


Q20: How can I keep track of my CIS deductions and payments effectively?

A: Use digital tools and software to maintain accurate records, and regularly review your CIS statements and payments to HMRC.

 


 

 

 

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