COMPLIANCE
is made to them through an online process. HMRC will confirm whether the subcontractor is registered for net or gross payment status, or unregistered. A contractor doesn’t have to verify a subcontractor if they last included that subcontractor on a CIS return in the current or two previous tax years. 6 ) Deduct tax, pay it to HMRC and give a statement to the subcontractor Where a subcontractor doesn’t have gross payment status, the contractor must deduct tax from the contract payment before paying the subcontractor, pay that tax to HMRC and provide the subcontractor with a statement showing the deduction made. When calculating the CIS tax deduction, the direct actual cost to the subcontractor of the following are not treated as part of the contract payment: l materials l consumable stores l fuel (but not fuel for travelling) l plant hire l the cost to the subcontractor of manufacturing or prefabricating materials used. These must be actual costs and they must be costs directly incurred by the subcontractor the contractor has engaged with. Contractors must pay any CIS tax deducted over to HMRC within 14 days of the tax month end to which it relates if paying by post, or within 17 days of the tax month end if paying electronically. The contractor must also provide a written statement to every subcontractor from whom a tax deduction has been made within 14 days of each tax month end (the same date the monthly return must be submitted by). Contractors must include certain information in the statement but are otherwise free to decide on its style. 7 ) Submit monthly CIS returns Contractors are required to send HMRC a monthly return (a CIS300) including all payments made to subcontractors in that tax month. The return must include details for the tax month of: l the subcontractors paid l payments made (including those to subcontractors with gross payment status)
If, during this annual check, tax compliance failures beyond those tolerated by HMRC are identified, HMRC will notify the subcontractor their gross payment status will be removed and their payment status will change to the standard rate of 20% 90 days after the notice date. Contractors who have paid or verified that subcontractor within the last two years will be notified of that change. Subcontractors have the right to appeal the HMRC decision where there’s a reasonable excuse for the non-compliance identified. Subcontractors must ensure they appeal on a timely basis. Conclusion The CIS can be complex and is a focus area for HMRC. We’ve seen several enquiries by HMRC into non-compliance with CIS generally, but also specifically on: l how materials have been reported and then split out on invoices raised l the employment status of workers l whether the total contract has been included, rather than just the ‘construction’ element l whether the rules have been applied to all construction payments. “Subcontractors with gross payment status must remain compliant to retain that status” Subcontractors with gross payment status must remain compliant to retain that status. Losing gross payment status can have a serious impact on the subcontractor’s business because of cashflow issues and the potential loss of clients who’ll only work with subcontractors with gross status. If reasonable care hasn’t been exercised by contractors to operate the scheme, HMRC is able to recover that CIS tax for up to six years from the end of the tax year it relates to, together with interest charges and penalties. While there’s scope to reduce such settlements with HMRC in certain circumstances, this cannot be relied upon and may not reduce the final settlement with HMRC to nil. n
l costs treated as materials l tax deductions.
The return must be submitted to HMRC within 14 days of the end of the tax month. In practice, nil returns (where no subcontractors have been paid) are required, as HMRC will issue a penalty if no return is submitted for a tax month, unless a six-month period of inactivity has been registered with HMRC. How do subcontractors obtain gross payment status? To obtain gross payment status, the subcontractor must apply to HMRC and pass: l a business test; and l a turnover test; and l a compliance test. To meet the business test, the subcontractor’s business must be carried on in the UK via a bank account. The turnover test to be applied depends on the circumstances and whether the business is an individual, partnership or company. For example, the standard test requires for the 12-month period prior to application: l an individual to have net construction turnover of at least £30,000; l a partnership to have net construction turnover of at least £30,000 multiplied by the number of partners, or £100,000 if this is lower; and l a company to have net construction turnover of at least £30,000 multiplied by the number of directors, or £100,000 if this is lower. Companies wholly owned by a parent company or those holding gross payment status don’t need to pass the turnover test. To meet the compliance test, the business’s tax affairs for the 12-month period prior to application must be up to date, although HMRC will overlook some compliance failures (referred to as compliance tolerances). HMRC could refuse gross payment status if it has strong grounds for doubting the applicant’s future compliance. If refused, HMRC should notify the subcontractor of the decision and reasons in writing. Subcontractors from overseas must provide a tax clearance certificate from their home country tax authorities confirming they’ve been tax compliant. Businesses granted gross payment status will have their tax compliance automatically checked by HMRC annually.
| Professional in Payroll, Pensions and Reward | April 2023 | Issue 89 22
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