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WTF: you’ve paid your subcontractor's tax personally!

While sitting in the office reviewing my milky bone financials on Xero (and I can report that sales are going very well; thanks Xero!) I heard Jonathan talking to a client.

Why that’s friendly, you’ve paid your subcontractor's tax, personally.” explained Jonathan to a client who had called to ask about the implications of paying their subcontractor without checking their Construction Industry Scheme status and deducting any tax. 

It turns out that, when the subcontractor was verified with HMRC, 30% of the labour element of the subcontractors’ invoice should have been withheld; an amount of £3,000.

Jonathan went on to ask the client, “If the subcontractor had come to you and asked for an unsecured loan of £3,000 with no guarantee of a repayment date and also said that you should pay him interest on the money you had lent them; what would be your response?”

As this is a family friendly and professional article, the client’s answer can be paraphrased as: 

“No way. I’d be an idiot to do that and pay him interest as well!”

“Well,” said Jonathan. “That is exactly what you have done and now you have to pay HMRC £3,000 which will increase your overdraft, on which you are paying 10% interest. You will have to ask your subcontractor to refund the £3,000 that you have overpaid them.”

The client gave a big sigh as he relayed that he and the subcontractor had just had a falling out and he had also heard that the subcontractor was in financial difficulties (something about not having paid their personal tax liabilities for several years).

A previous Blog from the Dog for you

While not trying to rub their nose in it (this is something that happens to me occasionally when I have been a little bit naughty) Jonathan reminded the client that a previous Blog from the Dog, 'WTF! I've paid the subcontractor gross and now I have to pay his tax as well?' had addressed this very point.

With my acute hearing I could hear the client mutter that he had read the article but was not going to take tax advice from a dog; that he thought it was made up and that this would not happen to him in a month of Sundays!  In a sotto voce tone I heard Jonathan mutter something about not being able to teach an old dog new tricks. Me, I am always up to learn new tricks especially if there is a milky bone as a reward.

Contractors - Rowdens has a useful document to share

“I will resend you a copy of the document we have prepared for contractors to give to their subcontractors that sets out what needs to happen before you can pay them and which states that not getting the information you need to verify them will delay payment. 

This will ensure you do not make the same mistake.” said Jonathan.

If you would like a copy of this document join the Rowdens Facebook group and send a message “I’m an old dog and want to learn a new trick!” and we will send you a link.

Use Xero's CIS module

“And finally,” said Jonathan, “use the Xero CIS module to make sure you abide by the rules and automatically send your subcontractors the required deduction certificates each month. This will save you a lot of time and keep you on side with HMRC.”  

I heard the client exclaim, “What monthly deductions certificates?!!!” and that, my friends, is going to have to be the subject of a future blog as my dinner is being served.

My nice friends at Xero really are the cat’s whiskers (I have heard another phrase being used in relation to dogs that have not been to the vets for a certain operation but let’s stick with our feline one) with regards to CIS reporting. I encourage any contractor to get on board with Rowdens and Xero to ensure they do not end up lending money to a rubbish subcontractor.

Need more advice?

If you would like more information about the scenario detailed above and if you think you may be affected, please get in touch with the lovely team at Rowdens who will be only too pleased to help you.

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