CIS – how deductions and refunds can vary

All businesses involved in the construction industry are required to register for CIS; the Construction Industry Scheme, but limited companies and sole traders are treated quite differently within the scheme when it comes to deductions and claiming refunds from HMRC.

According to the legislation, all deductions made under CIS are treated as a “payment on account” of a subcontractor’s tax liability. However, there are some subtle distinctions relating to how these transactions are treated depending on the type of entity. Deductions suffered by a sole trader or partnership are treated as a payment on account of the tax due on their profits. In contrast, deductions suffered by a company are treated as a payment on account of that company’s liabilities.

This appears quite technical but what it means in practical, financial terms is that CIS deductions suffered by a sole trader or partnership can only be offset against that unincorporated business’s profits and these are generally calculated following the end of the trading year. Where the accounts show a loss, then the CIS deductions suffered will be refunded. However, there could be a significant time period before this money can be reclaimed.

In some cases, it may be possible for an unincorporated business to claim an in-year repayment rather than having to wait until the end of their trading period. For example, this could occur if the sole trader or partnership has ceased trading part way through the year. Any refund that may be due will be subject to the business having fully completed any necessary tax paperwork, including being up to date with income tax and class 4 NICs.

For companies, the situation is much more flexible and there are many more scenarios that enable CIS deductions to be reclaimed. The legislation allows a limited company to offset all CIS deductions suffered against any relevant liabilities. This can include any of the following:

Deductions made under CIS from payments to subcontractors;
Income tax deducted under PAYE from payments to directors and employees;
NIC deducted from payments to directors and employees;
NIC payable by the company in respect of payments to employees (employers’ NIC);
student loan repayments;
If deductions made by the company exceed the total amount of relevant liabilities in respect of the same period, the excess can be carried forwards to the following tax month and offset against liabilities that may arise in following months.

At the end of the tax year, a company can claim back any remaining excess deductions in two ways, either by:

seeking repayment of the excess deductions; or,
asking HMRC to retain the excess deductions to be offset against any potential corporation tax liabilities.

Any company seeking to offset deductions needs to ensure they retain evidence to support the amounts being claimed for (e.g. payment statements from contractors).

In April 2021, new rules came into operation that will have a negative impact for companies unable to provide evidence in support of their offset request amounts. HMRC now has increased powers to amend a company’s PAYE records, which could mean an underpayment of PAYE/NIC.

If a company offsets its CIS deductions against relevant liabilities, this is not lost money. When a company contractor offsets deductions suffered against deductions, these may have come via a subcontractor. The company contractor should file a return to HMRC showing deductions made from the subcontractor who was paid. This means that although HMRC may not actually receive the amounts deducted, each subcontractor is credited with the amounts deducted.

In terms of the difference in treatment between companies and sole traders or partnerships, the company contractor gets an almost immediate credit, but the sole trader subcontractor or partnership must wait for the credit until their self-assessment tax return is submitted.

If you are a business in the construction sector and would like support with tax and accountancy, RJP has many years of experience in your industry. You can contact us via partners@rjp.co.uk.

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