I’m sure we have all heard the lyrics to Madonna’s song, “We are living in a material world”…well HMRC have decided that focussing on materials (from a Tax / CIS stand point) may well be a new way of raising revenue.
For those who operate CIS as contractors and pay subcontractors will be aware of the rules on labour and materials. Where you pay subcontractors which can include amounts for materials there is no requirement for a deduction to be made on the materials part of the payment. HMRC has always accepted apportionments as long as the contractor is satisfied that the amount was fair.
Nothing has really changed insofar as the legislation or HMRC guidance but as sometimes happens HMRC have changed the goalposts. This is because HMRC took and won the case of Flemming & Son Construction (West Midlands) Ltd v HMRC, which was all about the CIS treatment of materials. In that case, The Tribunal agreed with HMRC that the contractor needs actual proof that the material expense is not overstated.
Enquiries into CIS have now increased particularly focussing on materials and HMRC are placing the onus on the contractor to prove the materials. It’s now not good enough to take your subbies at their word and HMRC will now expect a contractor to show that the amount paid for materials is correct to satisfy this new requirement. HMRC doesn’t always deal with the realities of the business world and therefore you can expect them to want extra time consuming work on the calculation of materials. Moving forward subbies will need receipts / invoices and/or do some checking of costs against materials to demonstrate they have not been inflated and not subject to the deduction.
So beware, if you are cannot show that you satisfy this requirement then HMRC will chase after the contractor. Failing to comply with these regulations as a contractor means that they are under threat of having their own gross status looked at.
For more details on the changing goalposts please don’t hesitate to contact our office.