The Construction Industry Scheme (CIS) is a special tax deduction scheme that deducts tax at source from certain payments relating to construction work. It is designed to counter the black economy that is perceived to exist in the construction industry and its poor record of tax compliance.
The burden of CIS is mainly on those making the payments. CIS is similar to the PAYE system in that, where tax is to be deducted, it is deducted at source by the person making the payments, ensuring that the tax is collected. However, unlike PAYE, tax is deducted under CIS at one of two rates depending on the status of the recipient.
What is gross payment status?
All sub-contractors within the CIS should register with HMRC to get one of two CIS payment statuses before they are paid under the construction contract: net or gross payment status. Failing to register with HMRC will mean that the contractor or client can only pay after deducting 30% tax, so it makes good commercial sense to register for a CIS payment status.
• Net payment status allows payment for work done with a 20% tax deduction (VAT and the cost of materials can be paid without tax deduction).
• Gross payment status is generally given to some of the larger firms; it allows contractors or clients to pay in full without any tax deduction.
Gross payment status is extremely valuable commercially because it gives a cash flow advantage. Gross payment status means that no tax deduction is made on payments and the sub-contractor pays any tax due at the normal due dates for income or corporation tax.
Possible Revocations of CIS status
HMRC annually reviews a sub-contractor's compliance with the CIS gross payment criteria. This is known by HMRC as a "scheduled review" or an "onging Tax Treatment Qualification Test or TTQT". HMRC also reviews 2% of gross payment status holders each week.
HMRC will not inform sub-contractors of the review date, and if a sub-contractor has never had its gross payment status threatened or removed by HMRC, it can assume that it has always passed its TTQT reviews.
Loss of gross payment status
If, following a TTQT review, gross payment status is to be revoked, HMRC will write to a sub-contractor using its standard letter (CIS 308). The CIS 308 letter will include information such as:
The date from which gross payment status will be revoked as being 90 days from the date of the letter itself.
The reasons for revocation of gross payment status.
The deadline for appeal.
If your CIS gross payment status is revoked, refused or cancelled there is an appeals process but it is important to note that the appeal notice must be given within 30 days after refusal or cancellation.
If on review of the reasons listed in the letter are considered to be incorrect or there is a reasonable excuse as to why one or more of the listed obligations was not met, the sub-contractor should consider lodging an appeal.
What to do if a CIS 308 letter is received
If you receive a CIS 308, first review the reasons given by HMRC for revocation of gross payment status:
Do you believe the facts are correct? For example, are the dates shown for the receipt of returns and payments matching the posting and payment transmission dates on your records?
For each failure, is there a reasonable excuse(s) that lasted until the return was posted or the payment was transmitted?
It is also important to note that once a sub-contractor lodges an appeal, its gross payment status is reinstated until that appeal is decided.
Deciding whether to appeal against revocation of gross payment status
In deciding whether to appeal, a sub-contractor should consider the following:
Once HMRC revoke gross payment status, sub-contractor cannot re-apply for gross payment status for 12 months. However, it may decide to accept the revocation now on the basis that it can then re-apply for gross payment status in a year's time.
Conversely, a sub-contractor may choose to appeal tactically (regardless of the merits of the appeal) if it is expecting a large one-off payment or experiencing cash flow problems. Once it has appealed, its gross payment status is reinstated until the appeal is decided. This may allow time to collect outstanding payments gross of tax.
Will the contractors of the sub-contractor stop giving it work once they are informed that the subcontractor has moved from gross to net. The powers of HMRC to remove gross payment status are discretionary. If workload will be affected materially it is essential that an appeal is made.
Upcoming changes to CIS - Consultation on security deposit obligation
In the Autumn 2017 Budget, the government announced that there would be a consultation in spring 2018 on measures to extend existing security deposit legislation to include corporation tax and the CIS. (At present, HMRC may require a company to make a security deposit if it has a history of failing to meet its VAT or PAYE obligations.)
Any extension that is introduced as a result of the consultation will be included in the Finance Bill 2019 and will take effect from 6 April 2019.