What is gross payment status?

Gross payment status allows contractors to take control of their own cash flow throughout the tax period and can dramatically improve reputation. Rather than see a substantial portion of earnings go immediately towards tax and national insurance contributions, by taking a gross income provides the contractor with extra liquidity that will prove useful when cash flow is tight.

Obtaining gross payment status demonstrates HMRC’s belief in the contractor to be financially responsible enough to pay their own tax and NICs on time, thus reinforcing their reputation as a responsible contractor with not only HMRC but with the bank, the clients and contractors.

How do I obtain gross payment status?

The rules for obtaining Gross Payment Status within HMRC’s CIS were simplified in 2016, but sub-contractors working in the construction industry must still jump through a number of hoops in order to be paid gross by their construction industry contractors. A business has to prove that it is involved in construction operations, satisfy HMRC that its “construction turnover” exceeds £30,000 for a sole trader or £30,000 per partner or director for firms and limited companies, and must be able to prove that all tax returns and payments are up to date.

Gaining gross payment status is, however, only part of the story. HMRC conduct regular checks that ensures a business remains qualified to hold gross payment status. These “scheduled reviews” take place automatically at least once in any twelve month period. HMRC’s guidance to subcontractors is somewhat vague as to the nature of the scheduled review and gives no detail of the circumstances that might lead to a business losing its gross payment status. However, more detailed guidance is contained within the CIS regulations and HMRC’s internal manuals.

How could you lose gross payment status?

Note that a business will fail the scheduled review if:

  • 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 the review;
  • any self-assessment return (income tax or Corporation Tax is outstanding at the time of the review; or
  • any payment of £100 or more due to HMRC is outstanding at the time of the review.

The sheer volume of situations that could give rise to a “scheduled review failure” makes it easy for a business to put its gross payment status at risk – especially as the review process is largely automated. Four or more late contractor returns, for example, will trigger an automatic “ad hoc” review irrespective of when the next scheduled review is due to take place.

Although the circumstances that can give rise to the removal of gross payment status are many, HMRC does have to follow a set procedure before reverting the contractor to payment under deduction.  There is a 90 day notice period that must be issued before gross payment status is revoked and of course a subcontractor has the right of appeal against the decision.

HMRC must also write to any contractors who have made payments to the subcontractor in the previous 2 years to advise them of the change at least 35 days in advance. So simplifying your CIS administration is probably a good idea!

Thanks to Gordon Thrower of MHA Macintyre Hudson for providing the excellent summary.