If you’re engaging with contractors and subcontractors via the Construction Industry Scheme, you must apply for gross status to allow you and the other parties in your supply chain to tax workers compliantly.
Unfortunately, some CIS payroll providers claim to do this, but in reality, aren’t applying for gross status or administering deductions appropriately.
If you’re found to be working with suppliers of this kind, it can put your agency at risk of losing your gross status, potentially resulting in disastrous financial losses and reputational damage.
To help protect the reputation and financial security of your business, your clients, and your subcontractors, you must adhere to the rules laid down by HMRC to maintain your gross status.
Even the tiniest slip-up can lead to a loss of gross status which, once lost, can be extremely hard to regain.
Here we provide more detail about gross payment status – what it is, how to apply for it, and the consequences of losing it.
What is the Construction Industry Scheme (CIS) Tax?
Construction Industry Scheme (CIS) tax is a payment on account of tax for self-employed workers in the construction sector. This tax payment was created by HMRC to increase revenue collected from the construction industry by deducting tax at source.
For the purpose of CIS tax, construction work includes:
- Most construction activity on permanent or temporary buildings, structures, roads, bridges, or other civil engineering works.
- Preparing the site, such as laying foundations and providing access works.
- Demolition & dismantling.
- Building.
- Alterations, repairs, and decorating.
- Installing heating, lighting, power, water, and ventilation systems.
Under this tax scheme, the amount of money deducted is based on the subcontractor’s tax status. In some cases, the contractor will be required to make a deduction from the payment they make to the subcontractor and pass this on to HMRC.
While in other cases, no deduction will be required.
HMRC defines a ‘contractor’ as “a business or other concern that pays subcontractors for construction work
Contractors may be construction companies and building firms, but may also be government departments, local authorities, and many other businesses that are normally known in the industry as ‘clients’.
” A ‘subcontractor’ is defined by HMRC as “a business that carries out construction work for a contractor.”
Please note: Where a worker is supplied to a contractor by or through an agency and the worker carries out construction operations under the terms of a contract they have with the agency,
the agency supplying the worker will be a subcontractor as far as the contractor is concerned. The contractor must apply the scheme when making payment to the agency.
Where a worker is merely introduced to the contractor by an agency and subsequently carries out construction operations under the terms of a contract they have with the contractor, the agency will not be considered the subcontractor.
Therefore, even in the most basic of supply chains, the worker, recruitment agency, and payroll (CIS) provider should all be registered under CIS and manage payments compliantly to avoid devastating financial losses for all parties.
All contractors must register for CIS with HMRC, however, it is up to the subcontractor whether or not they choose to register. To register (as a sub-contractor) call 0300 200 3210 and select option 1 twice and make sure you have the following information to hand:
Your company’s Corporation Tax number which you should have received from HMRC on a form called CT416. This is also known as your UTR – unique tax reference – number - Directors’ NI number
- Directors’ DOB
- Company Registration number:
- Company VAT number
- Company contact details:
- PAYE reference number
- Account Office Reference Number
- Gross turnover figure
- Cost of any materials purchased
- Company bank details
- Directors’ personal UTR number
Once registered, you will need to complete a monthly CIS return. Even if you have done no construction supplies, you still need to complete a NIL return.
This is done via your Government Gateway account. You will need to make sure that BEFORE you pay any suppliers from your agency you have verified them with the CIS helpline verbally or online.
Ensure you verify each one carefully as any tax you fail to deduct correctly becomes your liability.
Since some subcontractors may not be registered, it is also the contractor’s responsibility to verify the status of their subcontractors with HMRC.
Typically, subcontractors will fall into one of three categories:
- They are verified as ‘gross’ – no tax deduction is required.
- They are CIS registered – a 20% tax deduction is required.
- They are unregistered – a 30% tax deduction is required.
Once registered, your company will be granted net payment status.
This means that every client to which your agency supplies labour should have verified their agency suppliers with HMRC and, once verified, the client will make a 20% deduction on any invoices which are payable to you until your business
has received confirmation of the Gross Payment Status from HMRC.
You can apply for Gross Payment Status at the outset as long as you can prove you meet the qualifying conditions.
Once approved for gross status, contractors will pay the subcontractor in full, without any deductions.
The subcontractor then pays all their tax and National Insurance at the end of the year, rather than having had some paid on account via the 20% deduction at source.
If the contractor fails to deduct the right amount of tax from their subcontractors (whether this is a sole trader, business, or recruitment agency) or fails to correctly notify HMRC of their subcontractor payments,
they may face fines of up to £3,000 and can potentially lose their own CIS gross status.
To qualify for gross payment status, you (the subcontractor) must prove to HMRC that your business complies with some basic tests. You’ll need to show that:
- You’ve paid your tax and National Insurance on time in the past and complied with your tax obligations.
- Your business does construction work or provides labour for the construction sector in the UK.
- Your business is run in the UK through a bank account.
- Your business has a net construction turnover of £30,000 each year for each relevant person (director and beneficial shareholder if the company is close) or at least £100,000. This test is based on ‘net construction turnover’.
This is the company’s gross income from construction work excluding VAT and the cost of any materials.
Companies that are wholly owned by companies that already have gross payment status under CIS do not have to pass the turnover test.
Companies can take the standard test or the alternative test.
To pass the standard test the company must be able to demonstrate a net construction turnover of at least £30,000 for each director, and if the company is close, for each beneficial shareholder, in the 12-month period before the
date of the gross payment application. To pass the alternative test, the company must be able to demonstrate a net turnover of at least £100,000 during the same period.
You will also need to pass the compliance test whereby during the period of up to 12 months to the date of the application for gross payment, the company should have done all of the following: - Completed and returned by the due date all Self-Assessment Tax Returns due
- Completed and returned by the due dates any monthly returns due from the company as a contractor in the construction industry
- Paid by the due dates any PAYE tax and NICS due from the company as an employer
- Paid by the due dates any deductions due from the company as a contractor in the construction industry
When considering whether the company has passed the compliance test HMRC will disregard, during the same 12-month period, any or all of the following: - 3 late submissions of the contractor’s monthly return – up to 28 days late
- 3 late payments of PAYE/NICs/CIS deductions – up to 14 days late
- Any self-assessment return made late – up to 28 days late
If the company’s application to be paid gross is unsuccessful, its construction industry payments will usually be paid under a 20% deduction. HMRC will write to the company giving the actual reasons why it has been unsuccessful along with advice on how the company can appeal.
Providing accurate information to HMRC is vital at this stage as if you provide false information you could receive hefty fines.
If you have been a director of other companies, HMRC will check your background and they will want to know that you have complied with all your HMRC payments and filing of returns in the past.
If you have not, it is possible that you may not be granted gross payment status either now or in the future.
HMRC conducts regular checks to ensure that a subcontractor continues to qualify for gross status after their initial application. HMRC uses computer-generated reviews on a rolling programme to evaluate the compliance performance of gross-paid subcontractors over the previous 12 months.
Guidance to subcontractors from HMRC notes that a business might fail the scheduled review if any of the following apply:
- Any contractor returns have been late on four or more occasions.
- Any one contractor return is over 28 days late
- Any PAYE or CIS payments have been late on four or more occasions.
- Any one PAYE or CIS payment is more than 14 days late.
- Any self-assessment payment is more than 28 days late.
- Any Corporation Tax payment is more than 28 days late (or is outstanding at the date of the review).
- A P35 is still outstanding at the time of review.
- Any self-assessment return (Income Tax or Corporation Tax is outstanding at the time of review).
- Any payment of £100 or more due to HMRC is outstanding at the time of review.
These rules mean that any tax, interest charge, penalty, or surcharge of over £100 paid after the due date can result in summary revocation of gross payment status.
These rules are the same for everyone, whether you are applying for gross payment status for the first time, trying to regain it after failing an earlier test, or being reviewed as an existing gross payment subcontractor.
This means that any re-applications for gross status will be unsuccessful until you can demonstrate at least 12 months of compliance.
It is easy for a business to find its gross status at risk, especially due to the large number of criteria considered in this automated process.
Four or more late contractor returns, for example, could trigger an automatic ‘ad hoc’ review irrespective of when the next review is scheduled to take place – potentially leading to a gross payment status loss.
This means it’s vital that you’re always on top of your payments and compliance responsibilities.
If you are found to no longer be eligible for gross payment status, HMRC must follow a set procedure before they can remove your gross status completely.
You will be automatically issued a CIS 308 notice to advise you that you are failing one of the rules of gross payment and given 90 days’ notice that your gross status will be revoked.
You will have 30 days to appeal the decision, which, if successful, will mean your gross payment status can remain.
HMRC must also write to any contractors who have paid the concerned subcontractor in the previous 2 years to advise them of the change.
This written notice must be shared at least 35 days in advance of the gross status being revoked.
This, in itself, can cause a serious loss of trust amongst other customers, even if the gross status is subsequently retained.
Unfortunately, sometimes errors can occur in HMRC’s checking process and there have been occasions noted where HMRC has cancelled the Gross Status without the appropriate notice being produced by the system.
To protect yourself and minimise your risk of such errors impacting your business, it is advisable to make sure HMRC always has an up-to-date version of your contact details so you know the instant a problem may arise.
You should also always remain alert to any unexpected deductions from payments made through CIS.
If you lose your gross payment status, it’s exceptionally hard to get back.
You will be unable to re-apply for at least 12 months. This can have a huge impact on cash flow, so it’s vital to ensure you’re always acting compliantly.
NOTE: HMRC can also cancel a contractor’s gross payment status if they fail to operate the scheme correctly.
