For a subcontractor registered under the construction industry scheme (CIS), obtaining gross payment status can be crucial to maximising cash flow. Without it, a contractor will be obliged to deduct tax from any payments in respect of construction work that a subcontractor undertakes on its behalf.
The rate of the withholding mentioned above is 20% if the subcontractor is registered under CIS. A subcontractor which is a company can offset any tax withheld against monthly payments due under PAYE.
Any excess over PAYE due can be carried forward and credited against the company’s corporation tax liability. Any surplus over a company’s corporation tax liability can then be reclaimed from HMRC.
If a company does not have sufficient PAYE payments or a corporation tax liability to fully credit CIS deductions suffered, a repayment is not generally automatic and a separate application needs to be made to HMRC.
Where a subcontractor also acts as a contractor, which can happen when a proportion of the construction work is not undertaken by the main subcontractor but is contracted out further, there might not be sufficient PAYE payments to ensure timely recovery of CIS deductions.
In which case there could be a real cash flow deficit as such a company will need to await filing of its corporation tax returns before obtaining credit for CIS deductions that it has suffered.
How to qualify for gross payment status.
In order to obtain gross payment status a subcontractor must provide evidence that it meets:
The Business Test
The business must be undertaken in the UK using a bank account as the main means of handling cash
The Turnover Test
For a trade carried on through a company, its net turnover needs to be at least £30,000 multiplied by the number of directors, or £100,000 if this is lower.
The Compliance Test
The company’s tax affairs for the previous 12-month period must be up to date. This includes corporation tax returns, PAYE and NIC filings together with CIS returns. (Note whilst VAT compliance is not currently included in this test this is likely to change in the relatively near future). For companies, the filing requirements also include any obligations enforced upon it by the Companies Act 2006.
Additionally, where a company is a ‘close company’ the compliance record of all of its shareholders may need to be considered.
Gross payment status can be applied for from the outset if it can be proved that a subcontractor meets all of the conditions. Evidence of expected turnover is crucial therefore HMRC might require a copy of a contract to be provided which will quantify the value of construction work that the subcontractor will be providing over the next 12 month period.
Maintaining Gross Payment Status and HMRC Reviews
A subcontractor is expected to maintain a good compliance record in the future, therefore should gross payment status be obtained, particular rigour should be applied to its tax filing obligations thereafter.
The subcontractor will be subject to an annual review by HMRC to ascertain whether it is keeping up to date with its compliance obligations. Additionally, any late submission of CIS/PAYE or Corporation Tax returns may trigger a review outside of the annual review period.
If, after a review, a subcontractor loses its gross payment status HMRC must inform it using form CIS 308. Form CIS 308 will advise the subcontractor of the compliance failures that have led to its decision and will give 90 days’ notice of gross payment status being removed. It will also inform the subcontractor that it can appeal in writing within 30 days of the notice. The subcontractor can keep its gross payment status until the outcome of the appeal has been decided.
Note that HMRC does make mistakes and so it is always worthwhile talking to a specialist to consider the merits of making an appeal. If gross payment status is revoked, the subcontractor cannot reapply for gross payment status for another 12 months. Once lost gross payment status can be extremely difficult to get back.
There is also a reputational risk because, under the procedures, HMRC will write to all contractors that have made payments to the subcontractor in the last 2 years that it has lost its gross payment status.
This article highlights one small aspect of the CIS rules and the compliance burdens that it creates for those operating in the construction sector as subcontractors. Ultimately obtaining, and maintaining, gross payment status might be the difference between a company being able to operate successfully or failing.
