Tricky VAT & CIS invoice & payment issue

[Homer J Simpson]

Okay, the background first.

I'm VAT registered and so is the contractor. The Contractor's CIS rate is 20%.

I have issued an invoice to the contractor for £4,500 (inc VAT) for materials I supplied.

Contractor has issued me an invoice for £5,000 (inc VAT) for labour only.

The two invoices relate to two different jobs.

The contractor is refusing to pay the £4,500

So, in order to process everything correctly and to ensure my accounting etc is all in order I wanted to process the £5,000 invoice as follows.......

£5k Invoice received
-£833.33 CIS payment made to HMRC
=£4,166.67 Payable to Contractor

Then use the £4,166.67 to offset against the £4,500 owed to me. Leaving a balance of £333.33

This would allow me to offset the £833.33 VAT I've paid on his invoice against the £750 I'm charging on my invoice, leaving me with a £83.33 rebate/offset. However, If I do this I'm unlikley to ever see the £333.33 again as we can safely say that neither of us will ever work together again.


However, as his invoice is for more than mine, am I able to only pay the difference and have the CIS payments deducted from that? i.e.

£5,000 invoiced to me minus the £4,500 I've invoiced him = £500 balance due to contractor.

Therefore, I process the payment of £500 as follows:

£500 invoiced
-£83.33 CIS payment made to HMRC
=£416.67 payable to contractor.

But I have a few questions if I do this.

Would I lose out on the VAT side of things. i.e my Invoice has £750 of VAT, I then only pay him £500 of which there is only £83.33 of VAT to offset?
Would this be seen as avoiding CIS? which is not my intention (hence why I want to process his full invoice via CIS system).

I need to ensure that whatever I do is correct in terms of VAT & CIS.

Any advice would be much appriciated.

[David Griffiths]

The simple answer is that you cannot pay the CIS on the netted off interest. You must pay the £833.33 due on the full invoice.

[Homer J Simpson]

Thanks, But what if I simply refuse to pay the invoice? I can't be liable for CIS of an unpaid invoice can I?

Seems crazy that I owe him less than he owes me but I'll end up out of pocket for doing the right thing.

[David Griffiths]

I'd have to agree with that - CIS deductions are applied to payment, so no payment, no deduction.

[talkinpeace]

TBH in your situation I'd splash the cash on a £35 small claims fee
as if he does not come to the table and talk he'd got a CCJ against him ...

and yes, CIS has no relation to the underlying reality of contra transactions

[Homer J Simpson]

Would like to avoid the CCJ route if possible.

The next problem is that if I do refuse to pay his invoice, the CIS deduction is not paid and then I will owe him money, which I'd like to actually pay (I just want to end the whole matter in one easy step). But I can't pay him the difference between the two invoices as this takes me back to square one where I'm essentially offsetting one against the other & his CIS becomes due again (which would leave me out of pocket).

Do you see my dilemma?

[Formbuild]

If you choose to pay him only £500 as you state, I cant see how HMRC can get all pissy seeing as you pay less in labour, they get less in CIS. Whether they look upon the reduced CIS they get by you offsetting one invoice against another as CIS avoidance I don't know. Ring them and ask.

With the VAT situation, you'd reclaim the £83.33, but needn't worry about the £750 vat on your invoice since he's not paying it anyway & you therefore have no liability to forward it on, unless you're on accrual accounting and have already paid the VAT on it.

This all seems far too complex. You're in a better position than him considering you owe him more money than he owes you. Just refuse to pay his invoice until he pays you. You won't have a CIS liability until you make the labour payment.