With gross payment status there are no deductions made by contractors. This improves cash-flow, business reputation and paperwork!
Not all businesses can qualify for gross payment status. To qualify you need to pass a turnover test and other criteria set by HMRC, which we will cover.
We recommend that any business that does qualify applies for gross payment status. We will explain how to complete the application.
We mentioned in the introduction that it improves cash-flow, business reputation and paperwork.
Under gross payment status the contractor will pay the subcontractor the full amount without deducting any taxes. The CIS tax rate is effectively 0%. As the full amount is received up front, the day to day cash-flow will be improved.
HMRC are trusting these businesses to save towards their end of year taxes. To earn this trust you must pass HMRC tests. Those that don’t qualify must remain on 20% CIS tax deductions. As a result, those businesses, which are on gross payment status, must have passed the HMRC tests. This gives the subcontractor an improved business reputation.
Some contractors assist on the subcontractor having gross payment status. Their reasoning being that gross status acts as an endorsement from HMRC. Also under 20% and 30% deductions the contractor is required to make deductions and pay these over to HMRC. The additional paperwork for both contractor and subcontractor is time consuming. Gross status is much easier to administer.
Subcontractors can apply to be paid gross. This means that the contractor will pay the subcontractor the full amount owed without making any CIS tax deductions. The CIS tax rate is therefore effectively 0%.
To qualify for gross payment status you must:
1) Be able to show that you are up to date will all of your tax liabilities and filings
2) Have a business bank account
3) Pass the turnover test
To pass the turnover test, HMRC will look at your last 12 months turnover. The labour only element (don’t include materials charged or vat) must be in excess of:
– Soletraders – £30,000
– Partnerships – £30,000 per partner or £100,000 for the whole partnership
– Limited Companies – £30,000 per Director or £100,000 for the whole company
Businesses that don’t qualify should still register as a subcontractor. The CIS tax rate will reduce from 30% to 20%. They can they apply for gross status at a later date.
Businesses can register for gross status by completing the relevant CIS forms.
Individuals apply using form CIS 302
Partnerships apply using form CIS 304
Limited companies apply using form CIS 305
Alternatively you can call the construction industry scheme helpline on 0300 200 3210.
TIP: Unregistered businesses with 30% deductions can register as a subcontractor and for gross payment status by accessing their Government Gateway account. On the tax account, select other services and then choose construction industry scheme subcontractors.
We typically find that it takes around a month to two months for the application to be processed and approved by HMRC.
In the mean time you will continue to suffer the 30% tax rate (unregistered) or 20% tax rate (registered as net deduction).
IMPORTANT: HMRC see CIS gross payment status as a privilege which they can withdraw. If you fall behind with your tax liabilities or make late filings then HMRC may decide to remove your gross payment status. This doesn’t just apply to CIS taxes and filings but all taxes. Not paying your corporation tax on time is just one example which could lead to the loss of CIS gross payment status.
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