CISR15060 - The Scheme: payments: materials

Section 61(1) Finance Act 2004

A deduction made under the scheme should only be applied to that part of the payment not representing the direct cost of materials to the subcontractor (FA04/S61 (1)). ‘Direct cost’ means what the subcontractor can demonstrate what they directly paid for the materials.

The materials used (which are deductible) must specifically relate to the construction contract to which the payment is being made. The materials therefore cannot relate to other construction contracts lying beneath the contract tier we are looking at, as we are looking specifically at the payment being made under a particular construction contract, and not at other payments relating to other construction contracts in lower tiers.

Example 1

Company A subcontracts construction work to Company B who, in turn, subcontracts part of that work to Company C. Company B purchases materials which are used by both Company B and C. As the materials used (or to be used) in carrying out the construction operations to which the payment relates were purchased by Company B, only Company B is entitled to the deduction for the material costs.

Where subcontractors further down a chain claim a deduction for materials supplied by the main contractor which the subcontractor doesn’t have to pay for from their own business, it follows those materials are not provided under a contract between them and the main contractor. As such, the cost of those materials cannot be deducted before a CIS tax deduction is applied to that subcontractor’s payment.

Example 2

Company A subcontracts construction work to Company B. Company B is required to meet the cost of any materials required to complete the construction work, these costs will be reimbursed to Company B by Company A.

Company B in turn subcontracts part of the work it is contracted to undertake for Company A to Company C. Under the contract between Company B and Company C, Company C is required to purchase the materials they will use, and Company B is required to reimburse Company C for all its material costs.

As Company C has received a reimbursement for the materials they purchased to fulfil the contract they are not entitled to a deduction cost for those materials.

Company B is also not entitled to any deduction costs it was required to meet, which includes both those that it purchased directly, and those that its reimbursed Company C for, as it was also reimbursed for the cost of those materials.

Note that SI2005/2045 reg 4(3)(b)(iii), makes it the main contractor’s responsibility to be satisfied that the direct cost of materials is reasonable.

Materials cost not disclosed or overstated

On occasions a contractor may be unable to obtain satisfactory information from the subcontractor about the cost of materials. In this case the contractor may make a reasonable estimate of the cost of materials and apply the deduction to the remainder.

You may receive an approach from a subcontractor who is reluctant to disclose the cost of materials because, for instance, they are charging a substantial ‘mark up’ to the contractor. You should advise the subcontractor that the law is clear on this and that if the subcontractor withholds this information the contractor will be entitled to estimate the cost of materials.

The contractor should also adopt this approach if the materials charge appears to have been overstated. Under a ‘supply and fix’ contract the subcontractor may claim, for instance, that the charge relates wholly to the supply of equipment (that is, ‘materials’), and that installation is ‘free’. This may be how matters are represented for marketing purposes but in reality the subcontractor incurs a commercial cost for both the equipment and its installation. If the equipment cost is not specified, the contractor must estimate it to determine what part of the overall payment is subject to deduction.Special cases

Refer to the information menu for details concerning the treatment of land purchase, plant hire and travel and accommodation expenses paid as ‘materials’.