Gross payment status is what many contractors and subcontractors view as the most beneficial outcome of the Construction Industry Scheme. It allows your business to take control of its own cash flow throughout the tax period and dramatically improves your subcontractor reputation with regards to reputable contractors.
The challenge for most subcontractors is being able to qualify for gross payment status. This guide will look at the advantages of gross payment status in the CIS and explain the basic requirements for qualification.
Before jumping into gross payment status, know that one of the advantages of being registered with the Construction Industry Scheme is a 10% reduction in payments sent directly to HMRC by your contractor, which will often end up coming back to you anyway. Your contractor sends only 20% of your payment (excluding VAT and material costs) to HMRC if you register for the CIS, instead of the 30% if you are not registered. This helps maintain your cash flow for your next job, helping you to cover wages, materials and other costs.
Gross payment status goes one step further to improve your cash flow. You will have no cash sent to HMRC by your contractor so you receive full payment. However, the advantages of gross payment status go well beyond direct monetary value and will directly affect t you and your business’s reputation.
Your business reputation, or prestige, is greatly improved if you are seen to have gross payment status by contractors. As gross payment status means HMRC trusts you to pay your own monthly tax payments on time, your contractor will also view you as a trusted and secure subcontractor. It also means that they will not need to worry about sending the 20/30% tax threshold to HMRC during your payment, which saves them time and worry as the fines for getting that wrong can be hefty.
You may find that many of the largest and most reputable contractors will require gross payment status from their subcontractors by default. So if you don’t qualify, you may be limiting your business potential.
Qualifying for gross payment status is one of the most difficult ventures for a subcontractor, and keeping it is equally as challenging to achieve in between your day to day tasks. This is why we recommend seeking the help from a CIS certified accountant, and you will soon see why. Remember, you will first need to be registered with the Construction Industry Scheme to enter this process.
Depending on your business formation, you will see slight differences in how you qualify for gross payment status, so keep that in mind when checking through the three qualification stages for gross payment status:
Is your business completing jobs within the UK, using bank transactions as your main method for handling cash? If yes, you have passed the business test.
This test depends on your business structure and whether you are earning enough to qualify as a sole trader, partnership or limited company. If you are a sole trader you will be expected to have an annual turnover of at least £30,000 (through construction work) to apply.
Partnerships and limited companies differ slightly in that it takes into account a lower limit of a £200,000 turnover or, if lower, £30,000 multiplied by the number of partners/directors in the business.
This final test makes sure you have complied with all tax regulations including income tax/corporation tax within the last 3 years. This means no late payments within the last three years. As mentioned, this is when you need to find a CIS qualified accountant who will be able to ensure you keep on track with payments and make the most out of your gross payment status.
If you fail to pass any of these tests, HMRC will pick up on it and remove your gross payment status. Depending on why you have lost it, you may also incur a potentially hefty fine from HMRC which can come about through failings with paying the right amount of tax at the right times. Ensure you keep on top of monthly tax payments, or have an accountant to do so.
If you believe your business has the potential to qualify for gross payment status under the Construction Industry Scheme, you will want to get in touch with an accountant specialised in dealing with gross payment status businesses. They will help you qualify and maintain your status for gross payment whilst you are free to win new contracts and get on with the jobs in hand.
If you are sure your business is unlikely to qualify for gross payment status, you will still be able to benefit from an improved cash flow by simply joining the Construction Industry Scheme. Your contractor will no longer send a 30% tax deposit to HMRC but now only send 20%. Although you will still need to receive refunds for extra tax paid to HMRC, you will not have as much cash tied up for the year which you are unable to do anything with.
Just Accountants CIS TIP – For those registered with the CIS but not gross payment certified, look out for services which take on the refund process for you. You could be charged either a percentage value of your tax refund or you may be charged a fee of around £200 to £300. The service will sort out your tax returns for you. If you are interested in this service, please give us a call on 0800 046 3690.