Although the amount of tax ultimately paid on profits will be the same if you obtain CIS gross payment status, improvements in cashflow and reductions in the cost of credit, such as overdraft interest, should easily make the application process worthwhile.
To be eligible to gain CIS gross payment status and receive payments from contractors gross, your ‘construction’ turnover, net of materials, has to be greater than £30,000. For partnerships and companies this limit increases by £30,000 for each additional partner or director, up to or exceeding £100,000. HM Revenue & Customs will apply 3 simple tests to determine whether they should issue CIS gross payment status or not. These are as follows:
- Business Test – You will need to prove you carry out construction work.
- Turnover Test – Your turnover must be greater than £30,000 per director/partner, up to or exceeding £100,000.
- Compliance Test – All of your tax affairs must be up to date and all tax returns and tax payments must have been submitted by the relevant deadlines.
Of course, as with everything regarding HM Revenue & Customs, forms have to be completed when applying for CIS gross payment status and eligibility has to be checked.
The ‘tests’ in more detail
Detailed below are the three tests in more detail, which then follows on with tips to overcome potential failures, appeals and managing cash flow.
Applications are unlikely to fail on this test alone and any failures on this basis must be agreed by a Higher Officer within HM Revenue & Customs, before the applicant is informed.
To pass the business test, HM Revenue & Customs will seek to confirm the following:
- The applicant is carrying on a business in the United Kingdom.
- The business consists of, or includes carrying out construction operations, or supplying labour for construction operations.
- The business is, to a substantial extent, carried on by means of an account with a bank.
The £30,000 threshold (‘standard’ test) is measured by reference to the previous 12 months and refers to ‘net’ construction income and is multiplied by the number of directors / partners, equal or exceeding £100,000. Net construction income is the total amount you have invoiced the customer, for activities within the construction industry, less related materials.
Related materials are the costs incurred in carrying out the construction contracts and include the following:
- Land, building materials and consumable items.
- Fuel for plant.
- The actual cost incurred for plant hire.
- Any Construction Industry Training Board levy.
The following items are not ‘materials’:
- Subsistence expenses.
- Fuel for travelling.
- Costs of scaffolding purchased by scaffolding subcontractors.
If the ‘standard’ £30,000 test as detailed above is not met, you may be able to meet one of other turnover tests, as follows:
If when multiplying the £30,000 threshold by the number of directors/partners in the business, is greater than your net construction income in the last 12 month due to the business has a high number of partners/directors, the alternative test may be applied.
To pass this test, the applicant must either be a company or partnership (not sole trader) whose total net construction turnover exceeds £100,000 in the previous 12 months.
‘Prospective’ receipts test
The turnover test will be passed if a company or partnership (not sole trader) can show evidence that relevant payments earned on its own account (work in progress) exceed £30,000 and construction contracts have been entered into where the combined value exceeds £100,000.
‘Subsidiary company’ test
A subsidiary company whose shares are wholly owned by a parent company (or companies) that holds gross payment status is exempted from the turnover test.
This exemption only applies as between companies. It does not apply to a company whose shares are wholly owned by an individual, partnership or trust that has gross payment status.
‘Inherited receipts’ test
Net contractor turnover in the 12 month period, earned by another business, may be included in new applications if:
- Individuals operating as sole traders that form a partnership to succeed their separate trades.
- An individual that incorporates.
- A partnership that incorporates, the former partners becoming directors/shareholders.
- A company that joins a partnership made up of individuals or companies.
‘Transferred receipts’ test
Where an existing construction business is sold as a going concern by its proprietor, the new owner will usually need to register under CIS.
Net contractor turnover in the 12 month period, earned by previous owner, can be used in support of the application.
- The new owner may only pass the turnover test on this basis where:
- The new owner is a company (not open to an individual or a partnership).
- The turnover transferred, taken together with turnover earned since the change of ownership, exceeds the turnover test threshold applicable to the new owner.
- The old owner would have been able to pass the compliance test at the date of transfer had this been applied.
‘Incidental receipts’ test.
If the following conditions are met, the turnover test may be met:
- The business does not mainly consist of carrying out construction operations.
- In the 12 months before the date of application your total turnover exceeded the turnover threshold defined in the standard or alternative test.
- In the year following the application, relevant payments in connection with construction operations are incidental.
The intention of this test is to assist substantial businesses outside the mainstream of the construction industry whose contracts are occasionally or incidentally affected by CIS. This might happen, for instance, to a manufacturer and supplier of industrial plant. If this business occasionally arranges for the installation of its products, these ‘supply and fix’ contracts may be subject to CIS.
The requirements of the test specify that the applicant must have submitted all returns and his paid taxes in full, by the relevant deadline in the previous 12 months prior to the application. This includes all taxes, and therefore is as follows:
- Company Tax Returns and Corporation Tax.
- PAYE and National Insurance returns and payments for employees.
- CIS payments and returns.
- Self Assessment Tax Returns for each partner.
- Income Tax and National Insurance payments for each director/partner under self assessment.
In most cases, any payment of tax made passed its due date during the previous 12 months, which is below £99.99, will be treated as meeting the compliance test.
If you have been overseas during the previous 12 months and have obtained a construction contract in the UK, you will be required to show that you have complied will all similar obligations in the country which you were resident, or that there were no such obligations.
Gross payment status applications may be refused where HM Revenue & Customs have ‘reasons to expect’ you will not continue to comply with future obligations on time.
Certain failures may be overlooked by HM Revenue & Customs when considering a gross payment status application, as follows:
- 3 late submissions of the contractor’s monthly return CIS300 – up to 28 days late.
- 3 late submissions for Real Time Information. – up to 14 days late.
- 3 late payments of CIS/PAYE deductions of £100 or more – up to 14 days late.
- 1 late payment of Self Assessment tax of £100 or more – up to 28 days late.
- Any late payments of Corporation Tax of £100 or more – up to 28 days late, including where any shortfall in the payment has incurred an interest charge but no penalty.
- Any late payment or outstanding interest charge for Corporation Tax or Self Assessment irrespective of the amount.
- Any Self Assessment return made late.
- Any Corporation tax return (form CT600) made late.
- Any failures classed as ‘minor and technical’ in respect of obligations preceding 6April 2007 where these are still within the twelve month qualifying period.
Overcoming test failures
Planning in advance of your gross payment status application may overcome some of the more common failures. Detailed below are some practical steps which can be taken to ensure failure does not occur:
Ensure you have a UK bank account.
Be able to support with documents/invoices that you operate in the Construction industry.
Try to limit the number of directors/partners in the business. However you should be aware that, for companies, HM Revenue & Customs may argue that although an individual is not officially appointed as a director, they may in substance be a ‘shadow’ director.
If commercially possible, invoice for work in advance.
For the prospective receipts test, be able to prove you have more than £30,000 of work in progress (surveyor’s measures, timesheets, sub-contractor invoices etc) and it is clear that within the construction contracts, turnover is greater than £100,000.
If you purchased the business and are using the transferred receipts test, before you agree a deal, ensure the previous owner was able to pass the compliance test. If not, try to negotiate deferred consideration to relieve the cash flow restraints of being paid under deduction.
For businesses which do not mainly consist of construction operations, be aware of the incidental receipts test.
- Consider merging with a similar business.
- Consider purchasing or being purchased by another business.
- Inflate margins on labour and deflate margins on materials, then clearly show each element separately on your sales invoice.
- Take on less profitable work which you sub-contract out.
If payments of tax are going to be made late, ensure you contact HM Revenue & Customs business payment support service and organise a time to pay arrangement.
Understand the importance of keeping up-to-date with compliance obligations and inform HM Revenue & Customs where a return or payment is going to be late.
For limited companies the director’s individual Self Assessment obligations no longer form a part of the initial or annual compliance tests which are reviewed when establishing whether or not a company qualifies for gross status. The company itself will be reviewed by HMRC, rather than the individual directors or shareholders.
Be aware that, where information is not available to submit a return on time, in some cases provisional returns can be submitted.
Be aware of compliance tolerance levels, as HMRC have introduced mandatory online filing, their records will update quicker and with greater accuracy.
For companies, where a CIS refund is due at the end of a tax year, of late HM Revenue & Customs have been taking some time to issue the repayment. Where this occurs, request this be off-set against your Corporation Tax liability.
Test failures and appeals
Usually gross payment status applications are declined due to compliance test failures, however you may be able to successfully appeal against the decision if you have a ‘reasonable’ excuse or HM Revenue & Customs have not applied the test correctly. Examples are as follows:
Where you can demonstrate that the late payment of tax was due to an unexpected failure of one of your customers or sudden difficulty in arranging finance and where your general background is one of good compliance, HM Revenue & Customs have in some cases taken a sympathetic view and allowed the appeal.
Ensure that refusal has not been made on something that is within the compliance tolerance levels.
Relevant 12 month period
Ensure the refusal has not been made on a compliance breach that occurred before 12 months of the application.
There is no statutory definition of a ‘reasonable excuse’, however examples are as follows:
- You have suffered a sudden and serious illness during the 12 month period.
- Unavoidable and unexpected absence close to the payment and filing dates because of business commitments or domestic emergencies.
- Accidental destruction of the records through fire or flood.
- Exceptional postal delays because of a strike by postal workers or other civil disturbance.
The documents were posted in good time but never reached HM Revenue & Customs. Such a claim should be accepted on the first occasion that it is made, provided that a further return or payment is then submitted promptly. Subsequent claims would need to be back up by evidence of posting.
Installing of a new computer system or program for the payroll or accounting which has hit unexpected teething problems.
Unfortunately, HM Revenue & Customs in most circumstances, will not allow ‘it was the accountants fault’, ‘the information was not available’, ‘my affairs are too complicated’, ‘I was too busy’ or if the payment was made in time and the cheque ‘bounced’, as a reasonable excuse.
Managing cash flow
If after appeal(s) you are not granted gross payment status, the following suggestions may help your cash flow:
Use sub-contractors who are paid under deduction so the CIS tax withheld can be off-set against CIS tax you have suffered.
For extreme cash flow difficulties, contact HM Revenue & Customs business payment support service and organise a ‘Time to Pay’ arrangement.
For failed applications, as the qualifying period is 12 months, there is no reason why you cannot apply for gross payment status a year later and be successful.
Practical Examples of our Construction Industry Scheme (CIS) Expertise:
Completing monthly CIS Returns.
Obtaining a refund of CIS deducted by customers, through offset against monthly PAYE/CIS payments.
Advising clients on how to present their invoices so that CIS tax is only deducted after making allowance for the Material content of work done.
Representing clients in front of The Commissioners, when gross payment status has been withdrawn by HMRC, because of poor tax compliance.