Back in December I wrote about the workings of the Construction Industry Scheme (CIS) and touched on the ability for a contractor to apply to HMRC for gross payment status, allowing a business operating within the construction industry to receive payments from its customers without any deduction of tax.

For many businesses, this provides a crucial cash flow benefit by allowing the organisation to settle its income tax in the normal way through the annual Self-Assessment tax return or Corporation tax return, rather than by the mandatory deductions throughout the year. For others, it is a requirement of becoming an approved contractor or for applying for larger tenders.

In order to qualify for gross payment status, you must be able to satisfy some tests imposed by HMRC as follows:

You have paid your tax and National Insurance on time, including PAYE and VAT
You operate a business bank account
You satisfy HMRC turnover tests, usually requiring an annual turnover of at least £30,000 as a sole trader, £30,000 per partner in a partnership or £30,000 per director in a company.
It is important to understand however, that HMRC carry out annual reviews of all businesses with gross payment status and a failure to continue to meet the conditions above can result in the benefit being stripped away with little notice. HMRC can also strip away gross payment status if the business fails to operate CIS correctly, particularly if engages with other subcontractors subject to CIS deductions.

In June this year, HMRC won a Supreme Court ruling setting a precedent which will allow them to disregard the adverse financial impact on a contractor of losing their gross payment status when carrying out their reviews.

My experience of the past is that HMRC have been fairly understanding of the damaging financial impact of losing gross payment status and in many cases of minor non-compliance they have often turned a blind eye. This latest development does however suggest a stricter regime may now be in force and for those with or aspiring to gain gross payment status, stresses the importance ensuring 100% compliance with HMRC.

This article originally appeared in the August/September edition of Wiltshire Business