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AIA

Surge in builders registering for gross payment status

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13th Nov 2015
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Record numbers of builders are registering to be paid gross as delays receiving end-of-year tax refunds escalate, says Daniel Knowles of Nixon Williams.

Data we obtained under the Freedom of Information Act reveals that 105,000 construction businesses were registered for gross payment in 2014/15, the highest number in four years. At the same time, the number of construction businesses has declined by 0.6%, from 253,121 to 247,105, so the increase cannot be attributed to natural growth in the sector.

So what is driving this trend? Well, worsening delays at HMRC paying annual tax refunds seems to be the main ‘push’ factor. Subcontractors who have joined the Construction Industry Scheme (CIS) often overpay tax and in many cases can wait six months or more for refunds. These delays can cause cash flow problems and have been known to push some businesses towards bankruptcy.

The CIS was devised as a way of reducing tax evasion in the construction industry. Registered CIS subcontractors have 20% of their pay deducted by contractors and handed over to HMRC, while unregistered subcontractors have 30% of their pay deducted by contractors. Subcontractors can, however, apply for gross payment status when they register for CIS. This means contractors pay them in full, without deductions. Subcontractors then pay all their tax and national insurance at the end of the tax year.

Gross payment status is sometimes regarded as a mixed blessing. It allowed subcontractors to manage their own tax affairs, but at the cost of a higher administrative burden and an annual review by HMRC. With delays over tax repayments mounting, growing numbers of subcontractors are realising that the extra hassle is now well worth the effort.

What’s particularly frustrating for many subcontractors is that HMRC had promised a 25-day turnaround target for tax repayments, but with staffing levels having been cut and additional security checks imposed, that 25-day deadline is almost never adhered to and the situation doesn’t look likely to improve anytime soon.

Daniel Knowles is a practice manager at Nixon Williams, a leading accountancy firm for contractors.

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