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This is a tricky subject, but we'll try to keep it simple.

If you have an entry for materials reimbursed on your monthly statement, it means that you have provided materials at your own expense, that the contractor has then repaid you for, along with your pay.

You are not taxed on the materials you are reimbursed for, when you complete your tax return you must enter the reimbursed materials, so that no additional tax is due on your net profit.

For example: if you earn £1000 and you provide materials to your contractor which he then pays you £500 for, the total pay to you is £1500 (£1000 labour and £500 materials). Tax is only deducted on the £1000 you were paid for the labour, so assuming you are CIS registered, you would have £200 tax deducted from you (20% of £1000 labour).

Your take-home pay would be £1300: £800 labour after-tax, plus £500 materials reimbursed to you. Although as you'd already spent £500 on the materials, your total profit would be £800, because the £500 extra you received was to cover the cost of the £500 you already spent on materials.

When it's time to complete your tax return, you would enter £1500 as your total gross pay, as this is the total amount paid to you. You would enter £500 for materials reimbursed, as this is the amount that was paid back to you, so your taxable net amount would be £1000, on which £200 pounds would need to be paid. Assuming you've had £200 deducted from you, there would be nothing additional owed or payable to HMRC. In this example situation, you wouldn't receive a tax rebate for these expenses, as you paid exactly the correct amount of tax.

This is how the calculation would look:

Gross pay £1500
Expenses £500
Net taxable profits £1000
Tax owed £200
Tax already deducted £200
Tax overpaid/underpaid £0
Your take home pay £800

If we reversed the calculation so that you only got paid for the labour, did purchase the materials, but were not reimbursed for them, the calculation is almost the same apart from a key difference to your net profit:

Gross pay £1000
Expenses £500
Net taxable profits £500
Tax owed £100
Tax already deducted £200
Tax overpaid/underpaid £100
Your take home pay £600

As you can see above, you get a rebate of £100 on the materials, but you are worse off because you have had to pay the entire cost of the materials that weren't reimbursed back to you, so you take home just £600.

So what would happen if you were reimbursed for materials, but didn't record it properly? Let's look at the same example once again, but this time without telling HMRC about the materials that you were reimbursed for: so let's say again that you earned £1000 and you provide £500 worth of materials to your contractor, which he then pays you £500 for. In total you have been paid £1500 (£1000 labour and £500 materials), just like last time. If you don't tell HMRC that £500 of this was for materials, then they will think that you were paid £1500 in total, and so they will charge you 20% of that figure (£300 tax) rather than the £1000 that they should be charging you 20% of (£200 tax). This would mean that you end up spending £100 more on tax than you should have done.

Gross pay £1500
Reported expenses £0
Actual expenses £500
Net taxable profits £1500
Tax owed £300
Tax already deducted £200
Tax overpaid/underpaid £100
Your take home pay £700

As you can see, it's important to get the materials figures correct, otherwise you could end up paying a lot more tax than you need to!


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