CIS Deductions and the Subcontractor’s Self Assessment: Statutory Framework
The Construction Industry Scheme is established by Chapter 3 of Part 3 of the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045). Under the scheme, tax is deducted from payments made by a contractor to a subcontractor and credited against the subcontractor’s own liability. The subcontractor’s Self Assessment return and the contractor’s returns therefore record the same payments from two directions.
1. CIS deductions from contract payments
Section 61 FA 2004 requires a contractor making a contract payment to a subcontractor to deduct a sum equal to the relevant percentage of the payment, excluding the part representing the direct cost of materials. The percentages currently prescribed are 20 per cent for a subcontractor registered for payment under deduction and 30 per cent for an unregistered subcontractor. No deduction is made from a payment to a subcontractor registered for gross payment under sections 63 to 67.
2. Treatment of sums deducted
Section 62 FA 2004 provides that, where the subcontractor is not a company, sums deducted under section 61 are treated as income tax paid on account of the subcontractor’s liability. The amount credited in the subcontractor’s Self Assessment is the amount actually deducted from payments made to that subcontractor.
3. Contractor’s returns and statements
Section 70 FA 2004 and regulation 4 of SI 2005/2045 require a contractor to make a monthly return to HMRC of contract payments made and sums deducted in each tax month. The same regulation requires the contractor to provide the subcontractor with a written statement of the payment and the deduction for each tax month. HMRC’s records of deductions are compiled from the contractor’s monthly returns.
4. Discrepancies and discovery assessments
Where the figures in a subcontractor’s return differ from those in the contractor’s returns, HMRC may make an assessment under section 29 of the Taxes Management Act 1970, subject to the conditions and time limits in sections 29 and 34 to 36. An assessment under section 29 charges tax which ought to have been assessed; it does not provide a mechanism for reducing the liability shown in the return.
5. Returns submitted by a third party
The declaration on a Self Assessment return under section 8 TMA 1970 is made by the taxpayer, including where the return is prepared by another person. Paragraph 18 of Schedule 24 to the Finance Act 2007 provides that a person is liable to a penalty for a careless inaccuracy in a document given by that person’s agent, but is not liable where the person satisfies HMRC that reasonable care was taken to avoid the inaccuracy. Paragraph 1A of Schedule 24 provides a separate penalty for a person who deliberately supplies false information to, or withholds information from, another person, with the result that a document given to HMRC contains an inaccuracy.
6. Appeal and postponement
An assessment under section 29 may be appealed under section 31 TMA 1970, by notice given within 30 days in accordance with section 31A. Section 55 governs the postponement of tax in dispute pending determination of the appeal. Statutory review is available under sections 49A to 49I.
7. Overpayment relief
Where the tax charged for a year exceeds the correct liability, relief may be obtained by amendment of the return under section 9ZA TMA 1970 within 12 months after the filing date, or by a claim for overpayment relief under Schedule 1AB. A claim under Schedule 1AB must be made within four years after the end of the relevant tax year and is subject to the exclusions in paragraph 2 of that Schedule. The withdrawal or reduction of an assessment does not of itself constitute a claim for overpayment relief.
Key points
CIS deductions are credited against the subcontractor’s Self Assessment liability under section 62 FA 2004.
HMRC’s record of deductions is compiled from the contractor’s monthly returns under regulation 4 of SI 2005/2045.
A discrepancy between the subcontractor’s return and the contractor’s returns may give rise to a discovery assessment under section 29 TMA 1970.
The penalty position where a return is prepared by an agent is governed by paragraph 18 of Schedule 24 FA 2007.
Repayment of tax overpaid is obtained by amendment under section 9ZA or by a claim under Schedule 1AB TMA 1970.
Legislation referenced
Finance Act 2004, ss 57–77 (in particular ss 61, 62, 63–67, 70)
Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045), reg 4
Taxes Management Act 1970, ss 8, 9ZA, 29, 31, 31A, 34–36, 49A–49I, 55, Sch 1AB
Finance Act 2007, Schedule 24, paras 1A, 18
