Here’s a situation I’ve been dealing with for a little while.
Essentially, the CIS forces contractors to pay over tax liabilities which properly belong to other people, with little chance of recovery.
This means that in the best case there is a laborious paper-chase; in the worst case there is a disproportionate penalty for a minor slip-up; in either case, the amount you have to pay is dependent on how well other people fulfil their responsibilities, which is beyond your control.
I think the consequences of mistakes should be limited to penalties based on the size of mistake made. Paying over the actual tax is unfair and disproportionate.
The Construction Industry Scheme is a system for making sure that sub-contractors in the construction industry pay their tax over in time. Essentially it works like PAYE, but is a bit simplified: when you pay a sub-contractor, you deduct an part of the payment and send it to HMRC.
There are three levels of tax you might have to deduct: 30% is the default, but if the contractor is registered with HMRC you only deduct 20%; if HMRC are very happy with the subcontractor, you can pay gross (ie deduct no tax at all). The contractor is responsible for making sure he deducts the right level of tax.
So if a subcontractor isn’t registered, then instead of paying him £1,000 I should actually give him £700, and send the other £300 (ie the 30% tax) to HMRC, giving the sub-contractor a voucher to say that’s what I’ve done. He then gets to credit that £300 off against his Self-Assessment tax due, and everyone’s happy.
If the contractor gets it wrong, there’s a bit of an issue. If I only deduct £200 for whatever reason, then HMRC have missed out on £100 I should have paid them, and so they will demand that I pay it over.
But the sub-contractor only has a voucher for £200, so can only have taken credit for that. So what that means is that I need to pay HMRC, and they then need to get in touch with the subcontractor to tell him that he’s owed a £100 rebate. And then he will naturally forward that £100 back to me, as otherwsie he’ll have been paid £1,100 (£800 cash, £200 tax credit, £100 tax rebate) for a £1,000 job.
There are three problems here:
1) I depend on HMRC to make sure the subbie gets the £100 rebate
2) I depend on the subbie to agree that the money is mine
3) I have no way to force him to pay it back
Now CIS is predicated on the idea that sub-contractors are rubbish at working out their tax. If they were good at it, we wouldn’t need the CIS. So even if we assume HMRC will pay him his rebate, then I’m really going to struggle to get him to realise that it’s my money really. And even if he agrees, if I then dock £100 from his next invoice (assuming he’s still working for me), I’m going to have a very annoyed sub-contractor heading my way, possibly waving a lawyer and quite probably threatening to walk out on the job.
So in the best case £100 goes round in a triangle and no-one is better off; in the worst case, HMRC force me to give the sub-contractor a £100 bonus (tax-free, incidentally) – or they just get to keep it. None of this seems terribly productive.
HMRC have thought of this, and CIS Regulation 9 allows HMRC to waive the requirement to pay the missing £100 if:
1) It was a bona fide mistake that wasn’t due to carelessness, or
2) The sub-contractor’s tax affairs are all up together.
This has two problems:
1) HMRC thinks that you can’t make a mistake if you take proper care, so there is almost no such thing as a bona fide error
2) The sub-contractor’s tax affairs are no business of mine. Why should I pay £100 because he’s being sloppy? What am I supposed to do about it, anyway?
So Reg 9 relief is hard to get, and so if I make a mistake I’m probably going to be out by the amount of the mistake. Plus interest and penalties. All this because HMRC doesn’t trust the sub-contractor – nothing to do with me.
There’s also a third point: If HMRC know that the sub-contractor’s affairs aren’t in order, why aren’t they seeking to put that right? If they don’t know there’s a problem then Reg 9 should let me off; if they do know there’s a problem, then if they fix it Reg 9 means I should be let off, and if they don’t, then why should I be penalised for their failure?
So if Reg 9 is not to apply to me, it’s only because HMRC have failed to get the subcontrator to pay his tax. Turning that round: I should compensate HMRC for their failure.
I don’t see why the contractor should have to foot the bill for a sub-contractor’s sloppy tax filings. Regulation 9 acknowledges this, but I don’t think it goes anywhere near far enough.
In my view, asking the contractor to pay the amount that has been mis-reported is levying the sub-contractor’s tax bill on the contractor, which is not reasonable. Especially as the sub-contractor’s tax liability should all have been paid in full anyway.
Is it not sufficient to levy a penalty on the contractor for the Potential Lost Revenue?
If it really is a careless error, the penalty would be a minimum of 15% of the tax, under the new rules, and that doesn’t seem unreasonable: it allows for 15% of subcontractors to evade their taxes completely, and if we’re at that level of evasion HMRC should be concentrating on that, not on the contractors.
As it stands, your effective penalty is more like 115%, which is what would be expected for serious cases of deliberate, concealed evasion, probably with an offshore aspect. It’s a jail sentence for littering.