Importance of tax compliance for gross payment status
Considering the changes introduced to the Construction Industry Scheme (CIS) legislation from April 2021, including the expansion of the penalty regime for providing false information when applying for gross payment status, it is worth reiterating that subcontractors who want to apply for gross payment status or already hold that status must maintain their tax compliance obligations.
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:
The business undertakes construction work (or provides labour for it) in the UK and operates it through a bank account
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 a sole trader
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 for gross payment
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.
If a subcontractor is unsuccessful in their application, HMRC will advise them in writing, providing reasons why the application for gross payment was refused. The refusal to grant gross payment status does have the right of appeal
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:
- Completed and returned by the due date any monthly return (CIS300) from the business as a contractor in the construction industry.
- Completed and returned by the due the required self-assessment tax return
- Paid by the due date any tax and National Insurance due from the business as an employer
- 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, 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 circumstances, experience and other relevant attributes of the taxpayer when looking to establish if a reasonable excuse applies to the failure(s) that have 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 looking 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 standard net deduction rate.
The removal of gross payment status might also damage the subcontractor’s credibility with clients and could place the subcontractor at a commercial disadvantage or may well lead to the loss of contracts on the basis that contractors may prefer to engage only subcontractors that hold gross payment status.
Whilst a subcontractor can re-apply for gross payment status, they cannot make a new application until a year has passed 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 before 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 paramount to maintaining gross payment status or when looking to initially apply or when re-applying.
The impact of losing gross payment status on a business 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.
If you would like to raise anything we’ve discussed in this article, please contact us at [email protected] and talk to our expert team. We’re here to help.
How can The Guild help?
The Guild has in-house ex-HMRC Employer Compliance and CIS experts who can help you with an HMRC enquiry, whether at the outset of the review or at a point where HMRC demands are escalating.
The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact The Guild for information about its services.
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