Gross payment status: Importance of tax compliance
As a result of the April 2021 changes to the Construction Industry Scheme (CIS) legislation, including the expansion of the penalty regime for providing false information when applying for gross payment status, it is worth remembering that subcontractors who want to apply for gross payment status or who already hold gross payment must remain vigilant with their tax compliance.
What is gross payment status?
Under the provisions of CIS, a contractor is required to deduct CIS tax from the payments made to subcontractors and the rate of those deductions is determined by HMRC depending on whether the subcontractor has registered for the scheme and, if they have, what payment status and deduction rate is applicable.
The CIS deductions suffered by a subcontractor count as advance payments towards the subcontractor’s tax and National Insurance bill. There are 3 CIS deduction rates:
- Gross rate: 0%
- Standard net rate: 20%
- Higher rate (unregistered): 30%
Gross payment status allows a subcontractor within CIS to be paid gross by a contractor without deduction of CIS tax. The subcontractor will be responsible for paying their tax and National Insurance at the end of the tax year.
How to apply for gross payment status
A subcontractor can apply for gross payment status when they initially register for CIS or later if they so wish.
To qualify, the subcontractor must show HMRC that their business satisfies certain tests. These tests being:
- BUSINESS TEST
The business undertakes construction work (or provides labour for it) in the UK and operates it through a bank account
- TURNOVER TEST
The business must be able to demonstrate that its ‘net construction turnover’ in the 12 months prior to the application must be at least at the relevant limit – for example, £30,000 for each director or at least £100,000 for the whole company
- COMPLIANCE TEST
The business must have completed and submitted certain returns and paid on time certain tax and National Insurance liabilities during the 12 months prior to the application
It is important that the information provided when making the application is accurate as HMRC could look to charge a penalty where it is established that false information was used to register for gross status. A penalty up to a maximum of £3,000 can be charged from April 2021 where a person provides false information or helps someone else make a false application.
It would be a mistake to think that only the initial application requires the subcontractor’s compliance to be in order. Applying for and obtaining gross payment status is only really the start of the process as HMRC will run an automatic annual test; the Tax Treatment Qualifying Test (TTQT) to ensure that the subcontractor maintains its compliant approach to returns and payment responsibilities.
The compliance tests used under the TTQT process are the same as those used under the gross payment application process:
- MONTHLY CIS300
Completed and returned by the due date any monthly return from the business as a contractor in the construction industry.
Completed and returned by the due the required self-assessment tax return
- EMPLOYER DUTIES
Paid by the due date any tax and National Insurance due from the business as an employer
- CONTRACTOR DUTIES
Paid by the due date any CIS deductions due from the business as a contractor in the construction industry
There are tolerance levels applied to these tests, meaning that certain failures can be disregarded when considering the compliance position.
Where HMRC establish failures during a compliance check, they may use these findings when considering the removal of a subcontractor’s gross payment status in line with the TTQT compliance tests.
For those subcontractors who fail the TTQT, HMRC will issue a notice to the subcontractor advising that they will lose their gross payment status and that their payment status for CIS deductions will change to the standard net rate of 20%. This change will be implemented 90 days after the date of the notice.
Contractors who have paid or verified a subcontractor within the last 2 years will also receive notification that the subcontractor’s tax status will be changing from gross to net.
A subcontractor has the right of appeal against the gross payment removal, and it is important that where the subcontractor wishes to contest the withdrawal that the appeal is sent to HMRC without delay.
The subcontractor will need to be able to demonstrate that there was a reasonable excuse for the failure(s) and whilst HMRC can be somewhat intransigent in the way that it considers what constitutes ‘reasonable’, they should nevertheless look to consider the particular circumstances, experience and other relevant attributes of the taxpayer when looking to establish if a reasonable excuse applies to the failure(s) that has occurred.
HMRC are not obligated to consider the impact on a business when exercising its right to remove gross payment status, so that argument will not be sufficient on its own when seeking to retain gross payment status.
Consequences of losing gross payment status
The loss of gross payment status can have an immediate impact on a business’ cashflow, as payments will now be subject to CIS deductions at the net deduction rate.
The removal of gross payment status could also damage the subcontractor’s credibility with clients and lead to the loss of contracts or place the subcontractor at a commercial disadvantage, as some contractors may prefer to engage only subcontractors who hold gross payment status.
Whilst a subcontractor can re-apply for gross payment status, they cannot make a new application for a period of one year from the date the gross status was removed. In addition, they will need to have a good compliance history for the 12-month period immediately prior to the re-application date.
There are obvious advantages to holding gross payment status both from a cashflow perspective and commercial standings with both current and prospective new clients.
Staying tax compliant is clearly key to maintaining gross payment status or when looking to apply or re-apply.
The impact of losing gross payment status should not be underestimated, as plenty can happen in a year and we only have to look back over the last 12 months to see what a difference a year makes.
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