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Construction Industry Scheme: Gross Payment Status

Category Technical - TCN (archive)
AuthorTechnical Department
The Construction Industry Reform Implementation Panel, which consists of HMRC and industry representatives including the CIOT, has provided the following statement regarding the consequences of a contractor losing gross payment status. Gross Payment Test the Day of Reckoning

Should you be a Sub-contractor who currently receives your payments from Contractors gross, you should be aware that HMRC has just completed the first sample run of the “rolling annual review” to identify whether your compliance record will enable you to retain your gross payment status. Having undertaken a manual review of the system generated results HMRC will be issuing failure notices to about 30% of Sub-contractors within the sample.

The consequences of sub-contractor losing gross payment status are summarized below:

1) The Sub-contractors will suffer a cash flow deficiency of 20% of their labour costs for a year. This will be particularly acute where they are also Contractors and have to pay their Sub-contractors gross.

2) Companies may be able to offset any tax deducted from construction payments against any other payments to HMRC (namely PAYE monthly payments, National Insurance Contributions and Student Loan Deductions) and thus avoid the cash flow problem (but see 3 below). However this will be more work for both HMRC and businesses with no net cash flow benefit to HMRC. In addition the company will have to undertake considerable extra work to split all its invoices to its customers between labour and materials so that the Contractors can make the correct tax deduction.

3) Many large Companies / Sub-contractors will have the payroll and construction activities within different companies within the group. They will then NOT be able to avail themselves of the above offset. This could have very large adverse cash flow implications and force the companies to restructure themselves to be able to operate the offset.

4) The withdrawal of Gross Payment Status could trigger a reaction from potential customers, as they may consider the Sub-contractor to be less reliable as they are deemed to have not complied fully with the requirements of the current Tax Legislation.

5) Potential customers may not be prepared to accept Sub-contractors who have to be paid under deduction, thereby having a detrimental impact on the Sub-contractors ability to stay in businesses.

6) The combination of all the above cash flow and commercial factors is likely to send a number of Sub-contractors into liquidation

A Sub-contractor who has gross payment withdrawn can only apply to have it reinstated after 12 months have elapsed and must be able to demonstrate that the compliance position with HMRC is up to date and is fully compliant with all aspects of tax compliance.

Technical Department
020 7235 9381

 

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