Factoring Companies Guidebook
Contract Labour - CIS sub contractors Tax Exemption Certificate
The CIS scheme is run by the Inland Revenue to ensure that the income tax element of payment made for labour to those employed, principally in the construction industry, is paid.
Concerns
Any payment made to those without a certificate must have the basic level of income tax deducted. This is an obligation on the debtor. Unless the Agency placing the labour at the contractor is able to provide a CIS certificate, the debtor will probably withhold the tax element of the invoice. Thus any assigned debt to us would not be collectable in full.
Under the regulations, if the payment is made to someone other than the sub-contractor or a nominee, it must be dealt with as if it had been made to a sub-contractor. Where the contractor is asked to make payment without the deduction, to a nominee, the request must be refused unless both parties hold valid certificates. The only exception is where the certifying document method is used for payment to a debt factor. We do not hold and are not empowered to hold a certificate. If the conditions for payment to the nominee in full are not met, the contractor must either pay the nominee after deducting the tax or arrange payment be made direct to the certified sub-contractor.
Where conditions are not met, the debtor is required to deduct basic rate taxation in paying the Client. This should be on the labour element of the assigned invoice, but in reality tends to be on the gross invoice value.
If we were to make a facility available, we are still prone to the contractors and sub-contractors refusing to make payment without deduction, either at the start of the Discounting Agreement or at some later point in time, without notice. We would also need to know the renewal date of the sub-contractor's certificate and check that it has been renewed before accepting any new debts beyond the renewal date, or for any debts potentially falling due for payment after the renewal date.
Sub-contractors maintenance of obligation requires Inland Revenue payments are kept up to date.
Identification
Request a copy of the current CIS tax exemption certificate from the client. Review any tax deductions implications in any overseas countries e.g. withholding tax, or where sub-contractor's (debtor's) tax liability arises. Review debtor remittance advice notes for any deductions and clearly identify the reason.
