HM Revenue & Customs (HMRC) has started its latest Construction Industry Scheme (CIS) Repayment Pilot and begun writing to approximately 860 agents. The pilot is due to run through until December 2013.
A CIS Client Accounts Checklist and supporting notes are enclosed with each letter. A scanned copy of the Checklist is below, with the supporting notes repeated word for word:
Basis of use of the checklist
The checklist has been prepared as a tool for those agents who do not currently use anything similar. Some firms will already have in-house checklists and therefore may not wish to adopt the checklist provided. You are not required to use the checklist, but you may find that it is a useful aid for you to review key areas where there is a risk of mis-statement in your client’s self-employed income, and to encourage your client to put appropriate controls in place.
The notes below are intended to support the use of the checklist for firms or staff who are new to this area of practice. They are not prescriptive, but are a range of suggestions intended to support you and your client in addressing compliance risk issues for subcontractor businesses. They cover key risk areas; some may not be relevant to all clients; other risks may be relevant to particular clients.
Some of the areas covered by the checklist may require you to use your professional judgement in deciding whether the amounts to be included in the accounts are appropriate. This might be supported by discussions with your client, testing on a sample basis, or in exceptional circumstances a more detailed review of your client’s records.
Where your client needs to improve his record keeping or other processes to minimise risk of mis-statement there is space to record your main recommendations on the checklist.
Key risk areas
1.Completeness of income
1.1 Evidencing completeness of income for a subcontractor in the construction industry is a difficult task, as by the very nature of the job, work may be sporadic. However, encouraging your clients to keep good simple records can give you more confidence that income has been completely recorded and therefore included in the accounts.
1.2 Here are some techniques and suggestions that you may find helpful:
- Encourage your client to use a diary to keep records in. Work booked (and the amounts charged) can be recorded against the appropriate dates, as can mileage travelled and the nature of the journey (see below regarding mileage records). Odd items of business related expenditure can also be recorded, and for a very small business the receipts and pay advices can be kept in a diary. An A5 week to a view diary will normally be perfectly adequate. Alternatively a smartphone app can be used and copies of receipts taken on the phone’s camera, then uploaded to a computer for backup.
- When your client takes a few days away or is unable to find work, it is a good idea if he records this in the diary too, as it will help you check any unexplained gaps in work.
- For businesses that issue invoices, a duplicate book will frequently suffice, and the diary can be cross referenced to the invoice numbers. Alternatively they can also be prepared on a computer and a copy saved.
- Establish whether your client is ever paid in cash, and if so, encourage him to record this in the diary or App as cash and bank it intact.
- Having a separate business bank account (and credit card) used only for business transactions is a useful additional control. You will wish to see bank statements for the whole period and reconcile the account fully to be satisfied that all income paid into the account has been properly accounted for.
- It is common for contractors to fail to give subcontractors payment advices (although this is required by law). You may need to discuss this with your client and try and support them to push for these.
2.1 In order for expenses to be allowed against business profits they must be:
- Actually incurred by the owner of the business
- Be incurred wholly and exclusively for the purpose of the business, and
- Not be an expense which is disallowed.
Evidence of the expenditure and what it was used for should be retained. This will affect the work you do on expenses as follows:
2.2 Expenses incurred through bank or credit card transactions.
It is preferable that your client has and uses a separate business bank account and credit card (if appropriate). It is frequently the case that businesses fail to claim expenses if they are met through private resources, and without a receipt it may be difficult to evidence the expenditure. So it can be in your client’s interest to use a separate bank account. It is not necessary that this is designated a business account, just that it is kept separate from private money.
Where expenses have been met through an account with statements provided for the whole period, it is relatively easy to ensure that the expenditure was actually incurred and for what amount. However, only by checking the receipts can you be sure that the expenditure is a business expense.
2.3 Expenses incurred by cash
It is very difficult to be sure that the expenses have been actually incurred by your client, even with a receipt, unless this shows the client name and address. If there is significant cash expenditure, you will need to establish the source of the funds. Could it be undeclared income, or has the cash been drawn from the business account? You may wish to discuss with your client why such a high level of cash expenditure is necessary, and consider the response.
2.4 The checklist provides cross references to HMRC’s manuals where guidance is given about the particular expenses and how much might be allowable. In particular, it is worth noting the following:
- Fixed rate deduction for business use of home: A claim may only be made for a fixed rate deduction for business use of home if at least 25 hours work a month is carried on in the home. For smaller subcontractors, this is unlikely to be the case.
- Actual cost of use of home: In the case of an alternative claim based on the actual apportioned costs of using the home as an office, the calculation should be made in accordance with HMRC’s guidance which starts at BIM47800. It is likely that the actual time for which the home is used as an office will be small.
- The fixed rate deduction for motor expenses: This can be claimed, rather than the expenses incurred in relation to the vehicle, but not if capital allowances have already been claimed on the vehicle. To support a claim to the fixed rate deduction your client will need to keep good records of his business journeys (in the diary if he is using one). You may need to explain what counts as a business journey and what does not in this sector. (See HMRC’s guidance in BIM37600 onwards).
- Clothing: Claims for ordinary everyday clothing worn for work are not a business expense, but specialist protective clothing is permitted. In the case of subcontractors, this is likely to include: Hard hat, protective gloves, steel toe cap boots or other protective footwear; eye protection where necessary.
- Workers: Where someone (whether connected with your client or not) provides support or work for the business, it is appropriate that they are paid and that a deduction is made for this against profit. It might extend to clerical support, message taking, or even labouring provided by an adult child. Provided the work is appropriate, the payments are actually made and the pay is reasonable in relation to the work done these amounts will be deductible. However, you may need to advise your client about his obligation to register as an employer if anyone paid has another job, or if anyone is paid in excess of the Lower Earnings Limit (currently £109 per week). To support a deduction of this nature, you will need records of the work actually done for the payments and to identify the payments made. Ideally these payments should be made through the bank account rather than in cash.
- Meals during the day: No claim should be made in respect of meals taken during the day, irrespective of the nature of the work undertaken.
- Overnight expenses: Where work necessitates staying away from the client’s home, accommodation and reasonable subsistence may be claimed for, based on receipts and evidence of payment.
3. GAAP accounts
3.1 Unless the client prepares accounts on a cash basis (for 2013/14 onwards) the accounts must be prepared under GAAP. In particular this means that income must be accounted for in respect of unpaid, and unbilled work carried out within the accounting period. You will need to discuss this aspect with your client and if appropriate verify by reference to the after date income.
Using estimates is likely to be the solution to arriving at a valuation for these amounts, but if it is based on the evidence of the diary (work done) and subsequent invoices (if issued) and payments received then it is likely to be sufficiently reliable. It is possible that both debtors and work in progress are nil, but this can only be ascertained by enquiry, and should not be the starting assumption. (For HMRC information on GAAP see BIM31020)
4. Tax deduction certificates
4.1. It is widely known that many contractors are unwilling or unable to issue payment advice notes to their subcontractors, despite this being a legal requirement. You should ensure that your client is aware that he should receive a payment advice at a minimum in respect of each tax month. If there are particular contractors who do not comply, you may need to consider what steps your client can reasonably take to obtain confirmation of payments and tax deducted.
For HMRC information regarding the Construction Industry Scheme go to http://www.hmrc.gov.uk/cis/index.htm
For information regarding the Business Income Manuals (BIM) http://www.hmrc.gov.uk/manuals/bimmanual/index.htm
The letters are being issued by the Agent Learning and Support Team within HMRC and are part of HMRC’s wider Tax Agent Strategy, as the department effectively asks agents to become pseudo Tax Inspectors to assure their clients’ compliance.
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.
- HMRC’s CIS Good Practice Guide (abbeytaxblog.co.uk)
- HMRC begins CIS Repayment Pilot; 860 agents targeted (abbeytaxblog.co.uk)
- HMRC’s Tax Agent Strategy (abbeytaxblog.co.uk)