When should CIS be taken off a retention?
There are no special rules for retention payments and they are treated the same way as any other payments. Whether the retention payment is made gross or under deduction depends on the subcontractor’s tax status at the date of payment (this is the important part) and not when the work was actually done.
You should be taxed at the time of payment of the retention, the contractor must decide whether they must verify the subcontractor (in accordance with paragraphs 3.1 to 3.9) and then make the deduction required under the scheme.
In short CIS does not recognise projects or retentions, simply payments.
The status of the sub-contractor could change during the period that the retention money is held and failure to check is unlikely to constitute a reasonable excuse per 3.9 of the HMRC guidance https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340
A little extra of extra info:
For those sub-contractors who are paid after deduction of tax, the following example of a remittance advice (which the contractor may provide as a substitute for a deduction statement) may be of use:
A Contractor Ltd
PAYE reference 123/AB12345
Payment on 5 February 2022
Paid to A Sub-contractor Ltd UTR 12345 67890
Work on the ABC project, Gloshampton
|Retention @ 5%||(1,750)|
|VAT @ 20%||6,650|
|CIS tax deducted||(3,800)|
|Payment to account 88-77-66 55443322||36,100|
The CIS tax deducted at the standard rate of 20% is calculated on the labour element of the payment, after deduction of the 5% retention withheld by the contractor. 20% of £20,000 less the 5% retention gives £3,800.
Payment is calculated on the value paid to the sub-contractor. An application for payment or an invoice may be issued to the contractor, but it is the sum authorised for payment which counts for CIS. The only exception to this is a deduction made from the sub-contractor in respect of a CITB levy.
Get in touch
If you would like help to further understand how to CIS and retentions work just give us a call.