Gross Payment Status – careful you don’t lose it!

Losing Construction Industry Scheme Gross Payment Status can be extremely costly for a business, warns Paul Bray, partner in our Property & Construction Team. But how likely are you to win it back on appeal?

As many will know, subcontractors working in the construction industry are required to be registered as such with HMRC otherwise their invoices suffer a 30% tax deduction upon being paid by the contractor. Once registered they still potentially suffer a 20% tax deduction on what is commonly referred to as the ‘labour element.’

In reality, the amount that is taxed is actually the gross invoice less certain specified deductions, such as the cost of materials (the cost to the subcontractor, not what they have charged the customer) and fuel for plant (but not for travel costs).

Established businesses with a good track record can apply for Gross Payment Status, whereby no tax deductions are required at source ­– a significant cashflow saving, especially for limited companies, which often face a delay in utilising credit for tax they have suffered whilst still having to meet their ongoing expenses. In many cases, these expenses include paying their own subcontractors further down the labour chain with gross payment in full, even though they themselves might have only received 80% of the contract value from above.

The importance of being punctual

Maintaining Gross Payment Status is therefore vitally important and requires both the Construction Industry Scheme (CIS) registered business and its operators (be that sole trader, partners in the partnership or directors in the limited company) to keep their tax affairs up to date.

Whilst one or two late income tax, corporation tax or VAT returns and payments may be made late in any 12-month period without Gross Payment Status being under threat, tripping over a de minimis threshold means that HMRC could withdraw the status and suddenly the business is back to suffering 20% tax deductions, with no ability to reapply for a further 12 months.

Over the years I have advised many clients on firstly the process for obtaining Gross Payment Status, and secondly the importance of maintaining it. On occasions this has included needing to sit with the finance team and spell this out to directors who might be unconnected with the finance function and not realise the impact their late personal tax return filings or payments could have on the business.

What if it goes wrong?

Another area of our work is appealing against either initial refusal or the withdrawal of Gross Payment Status. You must have sufficient grounds to appeal and ones that have often failed are the impact removing this status could have on the ability of the business to continue functioning, or that substantial late filing penalties for missed returns are disproportionate to the offence. HMRC and Tribunals simply do not see the wider effect of the withdrawal of Gross Payment Status, but also point out that the legislation does not strictly allow them to accept an appeal simply because the outcome of failure is financially restricting.

Grounds for appeal

A recently published case, however, did throw a crumb of comfort for would-be appellants, and I must admit that I too have had similar success on occasions. In RMF Construction Services Ltd [2021] TC 07995, the First-tier Tribunal (FTT) found that the withdrawal of the company’s Gross Payment Status under the CIS after a delay of approximately eight years was disproportionate.

In very brief summary, HMRC withdrew the company’s Gross Payment Status under CIS on the basis that it did not have a reasonable excuse for some of its compliance failures. RMF appealed to the FTT against HMRC’s decision on the following grounds:

• a significant amount of time had elapsed since the company failed to comply with its compliance requirements; for example, it had been eight years since HMRC rejected the appellant’s appeal against the outcome of a Tax Treatment Qualifying Test carried out by HMRC;
• for the last four or five years, the appellant had satisfied all of the requirements to be granted Gross Payment Status;
• if the company were to apply for Gross Payment Status now, its application would be granted; and
• although the appellant accepted that the outcome of the Qualifying Test was technically correct, it could not accept that withdrawing Gross Payment Status eight years later was appropriate

The reason for the delay was that HMRC had asked for the appeal to be stayed behind two other cases where the Supreme Court dismissed the taxpayer company’s appeal against the removal of its Gross Payment Status, rejecting the argument that, in making its decision, HMRC should have taken into account the impact on the company’s business.

In addressing the issue of proportionality, the FTT found that the correct approach was to consider whether the withdrawal of Gross Payment Status in this case was “not merely harsh but plainly unfair” in the context of the objectives of the CIS. The FTT allowed the appeal, finding that the objective of the CIS (to ensure compliance) had been achieved by the threat of withdrawal of Gross Payment Status; to carry out that threat in the circumstances would be disproportionate. Although a lot related to the delay in removing the company’s Gross Payment Status, the case is interesting for the FTT’s comments on proportionality in the context of CIS.

I have successfully argued proportionality on occasions and on other occasions lost that argument too. This does, though, highlight again the need not to get into this position in the first place.

Our Property & Construction Team have many years’ experience of advising businesses on the requirements for obtaining and maintaining Gross Payment Status. We also offer health checks to point out areas of concern that could either cause CIS issues or indeed PAYE compliance problems.

Find out more about our Property Tax team