You are a subcontractor in the building trade. You are looking forward to improving your cash flow and have your invoices paid with no tax deducted. What do you need to do to secure this treatment and is it worthwhile?
Introduction
Gross payment status under the Construction Industry Scheme (CIS) allows subcontractors to receive payments without deductions for tax. This status can significantly improve cash flow for you in the construction industry. However, obtaining and maintaining this status involves meeting stringent criteria and adhering to specific compliance requirements.
To qualify for gross payment status, subcontractors must satisfy three primary tests: the business test, the turnover test and the compliance test.
Business test
The business test requires that you are actively engaged in construction work in the UK or provide labour for such work. Additionally, you must use a business bank account and maintain proper records, stock, equipment, and other facilities appropriate for running the business.
Turnover test
The turnover test mandates that the subcontractor’s income from construction contracts, excluding the direct cost of materials, meets specific thresholds. For individuals, the minimum turnover is £30,000. For partnerships, it is £30,000 multiplied by the number of partners, or £200,000, whichever is lower. For companies, the threshold is £30,000 multiplied by the number of relevant persons, or £200,000, whichever is lower.
Pro advice. Check the turnover levels first. You could be wasting your time looking into the gross payment status otherwise, and you can look at other ways to improve cash flow instead.
Compliance test
The compliance test is perhaps the most stringent. During the twelve months prior to the application, the business must have completed and returned all tax returns, supplied any requested tax information, and paid all taxes and NI due. This includes taxes as an individual, business, and employer, both in the UK and overseas. Again, check this to avoid frustration.
Proof of identity and documentation
Having determined the three conditions are met, the application is made. You can do this via your Agent Services account, or you can do it online or by post (see Follow up ).
Pro advice. When applying for gross payment status, you must provide proof of identity.
The application process can take at least one month for approval. It is crucial to ensure that all information provided is accurate, as submitting false statements or documents can result in penalties of up to £3,000.
Once granted, gross payment status is subject to continuous review. HMRC may cancel the status if it has reasonable grounds to suspect non-compliance, such as providing false information or failing to adhere to the CIS rules.
Pro advice. An annual check is conducted to ensure compliance, and subcontractors failing this check will be notified and given 90 days’ notice before the status is withdrawn. You can appeal against the cancellation within 30 days of notification.
Obtaining gross payment status under the Construction Industry Scheme can provide significant financial benefits in the construction industry. However, the process requires meticulous adherence to the qualifying conditions and continuous compliance with tax obligations.
Follow up
Gross payment status application
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.