After advice on tax

[Dann Stonelake]

I have a decorating business, my mate has a kitchen fitting business. He uses my business to decorate the kitchens. When I personally carry out the works I purchase materials and charge him £200 a day Labour plus the materials. For example 3 days - £600 + £275.49 materials ... he will deduct my 20% tax from labour earnings and pay me that plus my materials so £540 + £275.49.

Sometimes I sub someone in to do the kitchen as I'm busy. They charge me £150 per day. So say they do 3 days that totals £450. I charge subby out at £200 a day. So I invoice my mate for the 3 days at £600 and pay the subby £450. My mate deducts tax on the £200 still leaving me with £30 earnt ... this seems wrong ... am I missing something or am I meant to do something else here ? As I believe I should only be taxed personally on £150 ( £50 per day earnt off the subby ) which should leave me with £120.

Just slightly confused or is that for the tax return ? Please any advice welcome here

 

[DWS]

No this is not wrong,
The person engaging you needs to deduct 20% from your Labour costs which is £600 minus deductions leaves £480 and you then pay the sub-contractor working for you.
It is only materials that does not have CIS deducted, you engaging a sub-contractor is not classed as materials.
You also need to register as a Contractor and deduct CIS from the sub contractor doing the work for you.
If a sole trader this needs to be sent to HMRC every month along with the CIS return, if a Ltd Co you can offset this amount against the CIS you have had deducted.

 

[Dann Stonelake]

No this is not wrong,
The person engaging you needs to deduct 20% from your Labour costs which is £600 minus deductions leaves £480 and you then pay the sub-contractor working for you.
It is only materials that does not have CIS deducted, you engaging a sub-contractor is not classed as materials.
You also need to register as a Contractor and deduct CIS from the sub contractor doing the work for you.
If a sole trader this needs to be sent to HMRC every month along with the CIS return, if a Ltd Co you can offset this amount against the CIS you have had deducted.

Yes I gather materials doesn't need deducting. But real case scenario here ... I just invoiced for £900, 4.5 days @ £200 a day. The subby invoiced me for £675 @ £150 a day for 4.5 days. I should be making £50 a day on them right so I should only be taxed on £225 I make from them as that's my earning not the rest? I thought otherwise by time Ive been paid the subby and tax deducted from the total of £900 i have £30 ? That's the part that I'm lost on as doesn't seem worth me subbing out otherwise as I had to go look at jon source materials amd check theor work ?

 

[DWS]

You are still earning £50 a day off the sub contractor
You will have
£900-20% = £720
Pay out £675 leaves you with £45 plus the £180 sent to HMRC in CIS deductions equals £225
So when doing your end of year tax return you have
Income £900
Expenses £675
Leaves £225 of profit you pay tax on, CIS tax is a timing issue that is all, the deductions are still your money.

 

[David Griffiths]

You seem to be missing the point that the subcontract tax deduction is calculated on your gross income, and not on your earnings from the job. When your annual accounts are prepared, you start with the gross income, then deduct the costs (materials and subbie) to give the profit. Work out the tax on that and set your deduction against it.

As pointed out above, you should be deducting tax from your subcontractor as well.

 

[Newchodge]

I suggest you read this and apply it. https://www.gov.uk/what-is-the-construction-industry-scheme

You are both a sub-sontractor (working for the kotchen fitter) and a Contractor (subbing to the sub-contractor). You need to be registered as both. Your sub contractor needs to be reegistered as well. If they are not registered you deduct 30%.

 

[Sami Majoka]

Under CIS, your mate deducts 20% tax on labour, which is fine, but when you sub someone else, your tax should only apply to the profit you make (£150 in your example), not the full labour amount.

To fix this, record the £450 paid to the subby as a business expense on your tax return. This will correct the over-deduction and reflect your true taxable income.

Keep good records of all invoices and expenses, and if in doubt, check with an accountant or HMRC’s CIS helpline. Hope this helps—good luck with your business!

 

[NortonBishop]

And watchout for the VAT threshold if you are not registered for VAT and start subcontracting a lot of the work whilst you are working elsewhere.

 

[Lisa Thomas]

I'd be happy to recommend an accountant for you. It's worth paying a professional as mistakes can be costly!