The Construction Industry Scheme (CIS) was introduced in the UK in the 70s as a way to prevent tax avoidance. Although it has seen lots of revisions and updates over the years, the purpose is still the same.
Under current CIS rules, contractors must make CIS deductions from a subcontractor’s pay and then pass this on to HMRC. If the subcontractor is CIS registered, the deduction is 20%. If the contractor is not registered, the rate of deduction is 30%. However, if a subcontractor is granted gross payment status, they do not have any deductions made from their gross pay.
To qualify for CIS gross payment status, your business must pass a compliance test and turnover test. You must also prove your business does construction work in the UK and is run through a business bank account.
If your business passes the tests and you qualify for gross payment status, you will no longer have CIS deductions made from your pay. Instead, you’ll receive the full invoice amount and then pay income tax, corporation tax (if you are a limited company) and NI contributions when you complete your tax returns.
What does gross payment status mean for a limited company within the construction industry scheme?
If you operate as a limited company, you will invoice any contractors for your work, and they will pay your invoice in full without having to make any CIS deductions or payments,
You will then be responsible for submitting accurate self-assessment and company tax returns. Once your corporation tax has been calculated, you will pay this directly to HMRC.
Does gross status affect how subcontractors are paid?
CIS status affects how subcontractors are paid. Subcontractors who do not have gross payment status have CIS deducted from their pay at a rate of 20% (for construction industry scheme subcontractors) or 30% (for non-registered subcontractors).
The idea is that the CIS deductions will cover the subcontractor’s annual tax and national insurance contributions, which are calculated when they complete their self-assessment tax return or company tax returns. Most subbies overpay on CIS tax deductions, which means they can reclaim some of what they have paid when they complete their personal or corporation tax return.
However, having 20% or 30% deducted from every invoice can have a huge impact on cash flow. And this is why gross status is so desirable.
What makes a company eligible for gross payment status?
A subcontractor can apply for CIS gross payment status regardless of whether they are operating as a sole trader or limited company. However, to qualify for gross payment status, they must meet certain eligibility criteria.
Business test – this is the easiest test to pass. You must prove your business does construction work (or provides labour for it) in the UK and that your business is run through a business bank account.
Turnover test – if you are a sole trader, your turnover for the last 12 months must be at least £30,000 (excluding VAT and materials). If you operate as a partnership, your annual turnover must be at least £30,000 for each partner (excluding VAT and materials), or at least £100,000 for the whole partnership. For limited companies, your annual turnover must be at least £30,000 for each director (excluding VAT and materials), or at least £100,000 for the whole company.
Compliance test – you must have made all tax payments on time for the past 12 months. This includes income tax, national insurance, corporation tax, VAT, CIS, PAYE and any other liabilities. Any late payments will affect your application.
If you do not meet all the eligibility criteria, you are unlikely to qualify for gross payment status. And under no circumstances should you provide false information when you register for gross status.
How do you apply for gross payment status?
If you are confident you qualify for gross payment status, you must first register for CIS. You can apply for gross payment at the same time as registering.
If you are already CIS registered, you can register for gross status by calling the CIS helpline or completing an online form on the Government website.
Benefits of gross payment status
The biggest benefit to gross payment status is having greater control over your cash flow. You do not have to make any CIS tax deductions from your pay so you get paid all invoices in full and then pay tax in full at a later date (usually at the end of the tax year).
However, there are other advantages to gaining gross status.
Having gross payment status can help improve your business reputation as it shows HMRC trusts you to make tax payments on time. This can help you build trust and credibility with contractors.
It also means contractors don’t have to make any CIS deductions when you carry out any construction work for them. If they make mistakes around CIS payments, it can mean hefty fines, so not having to deal with deductions makes life easier for them. Some contractors will only work with gross status subcontractors for this reason.
Drawbacks of gross payment status
Although gross payment status offers many advantages, there are some drawbacks. Getting paid gross on every invoice means you have greater control of your cash flow. But it also means no tax deduction has been made, which means you’ll have to make your own tax provisions. Having a separate tax account can be a good way to set money aside.
If you don’t set aside any money for tax, you’ll have to find a large lump sum when your personal or business tax is due. Late payment of personal or business tax can cost you your gross payment status.
Can you lose gross payment status?
Being granted gross payment status doesn’t mean you will retain gross payment status forever. HMRC can conduct annual reviews to decide if you still qualify for gross payment status. They will be checking whether you are on time with your tax payments and tax returns.
You are allowed a small amount of late payments or returns, but if you fail your review, HMRC may cancel your gross payment status. If that happens, you will not be able to re-apply for gross payment status for at least 12 months after cancellation.
Conclusion
Gross payment status has its benefits, but if you do decide to register, make sure you put a system in place to account for tax. Paying late can result in you losing your status.
About HardHats
We can’t take away the headaches of tax, but we can help protect you from questions around the employment status of your subbies.
We specialise in creating watertight subcontractor agreements for construction companies. All you need to do is tell us how you work with your subbies, then we’ll create bespoke contracts and get your subbies to sign them electronically. No hassle for you – no hassle for them. A few minutes of your time for complete peace of mind.
Plus, we offer an insurance-backed guarantee on all our contracts, meaning if HMRC ever does open an enquiry, we’ll handle it on your behalf.
You can find out more about how it works here, or book a call and let us get started with your bespoke contractor-to-subcontractor agreements.