In the case of construction companies in the UK, cash flow can be as critical as the profits earned by those construction businesses. And here lies the importance of CIS Gross Payment Status.
According to the Construction Industry Scheme, contractors usually deduct taxes from payments made to their registered subcontractors. The general rate of deduction is 20%, and a non-registered or unverified subcontractor could incur a deduction rate of 30%. But CIS gross payment status ensures that the payment to subcontractors is deducted.
This doesn’t mean that the income of the subcontractor is tax-free; rather, it means that the payment is made to the subcontractor without any deduction, and the contractor will pay the tax later.
But what exactly is CIS Gross Payment Status and how can it affect your construction company?
What Is CIS Gross Payment Status?
CIS Gross Payment Status is an HMRC-approved method of paying CIS contractors.
Usually, the contractor makes a deduction for CIS tax from the subcontractor’s payment and then pays the deduction to HMRC as a prepayment of the subcontractor’s tax and NI.
In the case of gross payment status, there is no deduction of any CIS tax from the gross payment itself. Thus, the full payment is received by the subcontractor, and he takes care of the tax liabilities by preparing the tax returns. Both sole proprietors as well as partners would pay taxes on such income under the self-assessment tax scheme.
Impact of Gross Payments on Everything
If you are operating a growing construction business, the ability to have the total bill amount available will make things easier financially for you.
- Cash flow is improved
The easiest advantage from this point of view is the fact that you do not need to wait for deductions or refunds for money you have already earned.
Being able to get paid gross will provide you with additional working capital for:
- Supplier payments
- Material purchase
- Employee payments
- Subcontractor payments
- Fuel and transportation
- Tools and equipment
- Insurances
- Further business development
- Unexpected expenses
Cash flow management is crucial when you are running a number of projects at once.
- Less dependence on CIS refunds
Where tax has been taken off payments via CIS, the deductions represent advance payments against the liability for tax and National Insurance. In case the deductions end up being more than what was expected to pay, then the business will have to work on the necessary tax return and repayment procedures.
The gross payment status takes away the deduction of CIS from the payments made in the first place.
But this does not mean that the business has to consider planning for future tax payments rather than considering the total received payment as disposable income.
- Better control of working capital
Where a contractor makes payment to the subcontractor using the gross payment status, the standard CIS deduction is not deducted from the payment. This allows better cash flow management in the business.
Where a subcontractor makes huge turnovers monthly, the difference between being paid gross and deductions of 20% can make a big difference.
However, the advantage comes with a huge responsibility: proper accounting and tax planning.
Who May Qualify for CIS Gross Payment Status?
HMRC imposes several conditions that a business should meet to be able to get the gross payment status.
According to the HMRC guidelines, there are three major tests:
- Turnover test
- Business test
- Compliance test
A business must pass all of them.
Now let’s consider each one in detail.
1. The CIS Turnover Test
The turnover test includes consideration of the turnover of the net construction of the business.
Regarding the standard turnover test, the 12 months before the application will be considered by the HMRC. The thresholds differ from one business to another.
According to the current guidelines, the minimum turnover threshold, excluding VAT and cost of materials, is as:
| Business Structure | Minimum Turnover Requirement |
| Sole trader | £30,000 |
| Partnership | £30,000 per partner or £100,000 per partnership |
| Company | £30,000 per relevant director or £100,000 per company |
Sole traders cannot use this specific test.
2. The CIS Business Test
Just fulfilling the criteria of turnover is not enough to fulfil all the requirements as stated in the guidelines.
Secondly, the firm would have to be shown as a construction firm under the laws of the UK. The construction firm should behave as a construction firm and should undertake such activities. Additionally, the construction firm should also be operated mainly through its business account.
It is done to show that the individual is actually running his business and not just seeking gross payment treatment.
3. The CIS Compliance Test
This is perhaps the section that requires more attention.
You may be using the right turnover, and you may be running a proper construction company, but non-compliance with tax regulations will make it difficult for you to achieve or maintain gross payment status.
The compliance test that is done by HMRC will check your level of compliance with tax issues during the period when the test is done. This will involve your filing of tax returns on time, payment of taxes, and also, if you are doing PAYE, National Insurance, and CIS.
Where you are both contractor and employer, HMRC will be in a position to evaluate your compliance with deductions made from your subcontractors and employees to HMRC on time and also filing of monthly CIS returns.
This is why bookkeeping becomes an important aspect when you are applying for gross payment status.
What Do HMRC Check?
The compliance checks can take place in several different aspects of your tax situation.
Depending on the particular business, HMRC may wish to review:
- Self-Assessment tax returns
- Corporation Tax returns
- PAYE/National Insurance liabilities
- CIS deductions
- Monthly contractor CIS returns
- Payments of tax
- Payments of National Insurance
- Any information HMRC needs
HMRC’s own internal guidance notes that the Tax Treatment Qualification Test (TTQT) assesses compliance through the relevant HMRC systems.
Steps You Need To Take To Become Eligible For Gross Payments
You are eligible to apply for gross payment status when you register with CIS, or if your situation changes, you can also apply to move from payment deduction to gross payments.
This is based on the way you run your business, whether as a:
- Sole proprietor
- Partnership
- Ltd company
Documents such as your UTR, turnover information, proof of turnover and banking information may be necessary for your records.
Proof of turnover may involve documents such as invoices, bank statements and CIS payment/deduction certificate.
The important thing is that the information you provide to HMRC must be correct.
Common Mistakes That May Result in the Loss of Gross Status
Businesses in the construction sector may tend to emphasise finishing their projects and getting paid.
Some issues which may require special attention are as follows:
Failure to submit CIS monthly returns
In case you work both as a contractor and a subcontractor, you may be responsible for making your CIS returns yourself. In the eyes of HMRC, CIS monthly returns fall into the sphere of compliance.
Late tax payment
Late payment of tax can affect the compliance status of your business. Having enough money reserved for paying taxes is of particular importance when you get gross payment.
Incorrect data about your business
Your trading name together with your UTR number has to be the same as at HMRC in order to be able to prove your identity to your contractors.
Poor record keeping
Poor record keeping may cause complications in case HMRC asks you to provide evidence about your turnover or any other data.
Why is Professional CIS Accountancy Help Needed?
CIS is more than just a 20 per cent deduction.
Construction companies would have to deal with problems like subcontractor verification, CIS returns every month, deductions, accounting, VAT, payroll, Self-Assessment or Corporation Tax depending on their individual case. And here comes the role of professional accounting services.
Lexarox Accounts offers accounting assistance to construction businesses, which includes CIS returns, subcontractor verification, CIS gross payment, bookkeeping, VAT returns, payroll and other tax-related assistance.
The construction firm-specific service offered by Lexarox Accounts assists with subcontractor verification, CIS returns and deductions related to CIS, allowing construction firms to organise their accounting activities efficiently.
How Lexarox Accounts Can Help Construction Firms
Lexarox Accounts provides accounting services specially tailored to the financial needs of the construction industry.
They include:
- Preparation of CIS returns
- Subcontractor verification
- Help with CIS gross payment treatment
- Bookkeeping
- VAT returns
- Payroll
- Self-Assessment
- Annual accounts
- HMRC inspections
Lexarox Accounts’ CIS services are especially useful for companies that would like assistance in managing their CIS paperwork and monthly reports.
Even for those firms that are already using gross payment treatment, professional accounting services will help them keep their paperwork and reporting in order.
Conclusion
While CIS Gross Payment Status can prove very beneficial for qualifying construction subcontractors regarding their cash flow, there is one caveat – you need to ensure CIS and tax compliance.
In general, you need to pass HMRC’s turnover, business, and compliance tests. If you pass these tests, you will get your CIS payments without any deduction, which means that you will have more control over your working capital.
CIS Gross Payment Status is not permanent since HMRC reviews your status, and in case of finding anything wrong with you, your status will be cancelled. Therefore, the best option would be to remain compliant.
If you require any help with your CIS returns, bookkeeping and tax management, Lexarox Accounts offers specialised accounting solutions for construction companies.
One must understand that CIS obligations would be different depending on the structure of your business. An accountant would assist you in adapting them to your business case.
FAQs
What is CIS Gross Payment Status?
It helps qualify subcontractors to be paid with CIS without making any deduction from the tax.
Who qualifies for gross payment status?
Sole traders, partnerships and limited companies that carry out qualifying construction work in the UK qualify for the gross payment status provided that they satisfy the HMRC requirements.
What test should I pass?
In general, one has to pass the turnover, business and compliance tests.
Is gross payment status a tax-free status?
No. One still needs to report his/her income and make the relevant payments.
Does HMRC check the gross payment status?
Yes. It checks the gross payment status for businesses on an annual basis.
Is it possible that gross payment status is cancelled?
Yes. HMRC can cancel the status if the relevant conditions are no longer achieved.
Can I apply for gross payment status again?
One cannot reapply for the next two years following the withdrawal of the gross payment status.
