Deductions: credit and repayment: legal basis of claims
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Deductions under FA04/s61 (1) are made on account of tax and, where appropriate, Class 4 NIC payable on the subcontractor’s trading profits.
Where the subcontractor is not a company, the legislation states at FA04/s62 (2) that deductions are first to be treated as being Income Tax paid against the subcontractor’s own tax liability. Where the available deductions exceed the tax liability any balance may be set off against any Class 4 NIC liability.
While credit must be applied firstly against tax on income and secondly against any associated Class 4 NIC liability, no order of set-off is specified as between tax years or accounting periods. In practice, credit is normally given against the tax (and Class 4 NIC liability, if any) for the year or accounting period in which the deductions were made.
Where the subcontractor is a company, the legislation states at FA04/s62 (3) that deductions are first to be treated as paid on account of any ‘relevant liabilities’ of the subcontractor. ‘Relevant liabilities’ in this context means the company’s obligations to pay over to HMRC any PAYE, NICs, CIS deductions or Student Loan liabilities. Any excess deductions determined at the end of the tax year when the company has submitted its employer’s annual return on form P35 (for non RTI years), or Employer Payment Summary (EPS) returns (for RTI years), can be set against corporation tax liabilities or repaid.
Throughout this chapter, ‘credit’ can mean giving credit for deductions by set-off against established liabilities under SA or CTSA procedures or by repayment as indicated by the context.
A claim for credit from a subcontractor begins a process that should not be regarded as complete until either full credit has been given for the deductions or any part of the claim has been refused and the subcontractor told about any appeal rights.