If you are already registered with CIS, then you can apply for ‘gross payment status’. This means that you receive all of your payments from contractors in full, nothing will be deducted. Therefore you pay all your National Insurance and income tax at the end of each financial year.
Why should I apply for gross payment status?
Don’t let the process put you off! Yes, you still have to pay tax on your profits to the same amount at the end of each tax year. But, during the year, achieving this status can substantially lessen credit costs and increase direct cash flow. If your accountant or tax adviser hasn’t mentioned the CIS gross payment status option ask them or ask us for help.
Who is eligible to apply for CIS gross payment status?
Basically, you must be a construction business with a net turnover of £30,000 (or £30,000 per partner/director, if a partnership or company set-up). HMRC have 3 different tests that they apply to each individual application:
- Turnover Test – Does your company earn £30,000 turnover (per partner/director)?
- Compliance Test – Are your company’s tax affairs in order and fully compliant? This includes making all form submissions and payments by the official deadlines. There is some lee-way here, so don’t write it off because you know you were late with your last tax return.
- Business Test – Does your business do construction work?
Of course, there is a lot more fine detail in HMRC’s regulations. Here are some of the basics for each ‘Test’ and the fundamental preparations that you can do in order to secure a successful application. As Benjamin Franklin said: “By failing to prepare, you are preparing to fail.”
CIS Turnover Test
This area has a number of ‘sub-tests’ which apply to particular business structures, you need to see which best fits your situation.
- The standard ‘turnover test’ determines whether or not your net income over the past 12 months is £30,000 per partner/director. (Net income = total bill received by client – cost of materials for that job)
Preparations: if you can, invoice in advance. Be careful of HMRC’s definition of a ‘shadow’ director, where someone is considered a director even though don’t hold that office.
- Alternative Test – This is only for a business partnership or company, usually with a high number of partners or directors, which has a £200,000 turnover for past year.
- Subsidiary Company – if a parent company has gross payment status, then any subsidiaries automatically pass the turnover test.
- Transferred Receipts – this only applies if you have bought a construction business as a ‘going concern’ and need to apply as the new owner.
Preparations: work out if the business would have passed the turnover test before you bought it and, if not, try and get a deferral.
- Prospective Receipts Test – only for a company or business partnership that can prove they have contracts worth £200,000 and receipts for ongoing work worth £30,000.
Preparations: contract clarity, have written evidence of ongoing work (eg: surveyors’ measures, invoices from sub-contractors, timesheets etc.)
- Inherited Receipts – Under certain circumstances, if two businesses join together, the previously separate receipts can be counted towards the turnover test requirement.
This includes: companies joining a partnership, incorporated sole trader, incorporated partnership, sole traders making a partnership.
- Incidental Receipts – This is for companies who are only involved in CIS infrequently, such as the supply and maintenance of essential equipment. The business is not defined as ‘construction’.
Preparations: there are a number of considerations that may improve your tax situation like sub-contracting less profitable work or uniting with another company.
CIS Compliance Test
All of your tax returns must have been submitted on time and all taxes paid without incurring any penalties in the 12 months before you submit an application. This includes: employees’ PAYE and National Insurance returns, directors’/partners’ Self-Assessment tax returns and payments, Corporation Tax, CIS returns and payments and Company Tax Returns.
If you have been living in another country then you need evidence to prove that you followed their equivalent tax regulations.
Preparations: ask for any pending tax relief payments to be offset against your Corporation Tax, possibly submit a ‘provisional return’ if you are waiting for information, tell HMRC immediately if you are going to miss a submission or payment deadline, do not exceed the ‘compliance tolerance levels’.
‘Compliance tolerance levels’ are the limits to which you can push HMRC before you fail the Compliance Test. Including, but not exclusively: 3 CIS300 returns submitted up to 28 days late, one Self-Assessment payment of more than £100 that is up to 28 days late, a late CT600 (Corporation Tax Return).
CIS Business Test
This is a simple 3-point list:
- The business has a UK bank account
- Your business carries out its work in the UK
- The business is in the construction industry, either providing construction workers or actual building developments. This might be the business’s main function, or a partial element
Preparations: organise all your records as your evidence of your construction work, open a UK bank account
What if my application fails?
Gross payment status applications usually fail because the business has not passed the Compliance Test. There is an appeals procedure in place with different grounds on which you can appeal a rejected application, such as:
- ‘reasonable excuse’ – no specific HMRC definition here, but this includes things like serious illness, accidental destruction of records and other emergencies
- ‘lost in the post’ – if you have proof of postage and the documents in question would have arrived before the deadline
- ‘computer says no’ – not the official title! But HMRC do allow for glitches in new accountancy or payroll software
- ‘cash flow’ issues – for example, you are waiting for a client’s late payment and you can prove this with invoices
- ‘compliance tolerance’ – it’s worth double checking that any issues that have caused you to fail aren’t within compliance tolerance levels. Sometimes the date is outwith the applicable 12 month period and HMRC have made a simple error.
The regulations are a bit complicated, but that’s no reason to miss out on something that will benefit your business’s efficiency. You don’t have to do it by yourself. Many people consider it wise to seek the knowledge of a tax expert when completing a CIS Gross Payment Status submission.
