If you’re a subcontractor in the construction industry, then the contractor you work for will normally take CIS deductions from your pay each month, and pay these towards your income tax and National Insurance.
In some cases you can opt to handle your taxes independently without the contractor making CIS deductions, but only if you qualify for gross payment status. Qualifying for gross payment status means you are not taxed at source by a contractor.
Doing this can have many benefits, mainly down to the fact it can help improve your cash flow and make your life easier when it comes to sending your tax returns. Actually qualifying for gross status can be trickier than you might think though – not to mention a nightmare to get back if you ever lose your status.
We’ll look at what gross status is, how you can apply for it, and what happens if you were to lose it.
What is gross payment status?
Having gross payment status simply means you’ll receive payments from the contractor you work for without any deductions. Rather than the contractor deducting the tax that you owe, HMRC trusts you to record everything accurately in your Self Assessment tax return and to pay what you owe on time.
How do I apply for gross payment status?
You can apply for gross payment status either when you register for the Construction Industry Scheme, or at a later date – but you will need to be registered for CIS.
If you apply during the CIS registration process you can request this through your Government Gateway account. Head to ‘Your tax account’ and then ‘Other services.’ You’ll then need to choose ‘Construction Industry Scheme – Subcontractors.’
Do I qualify for gross payment status?
To qualify for gross status, you’ll need to prove that your business passes various tests:
- You pay your taxes and National Insurance on time
- Your business either does construction work or supplies labour for it in the UK
- Your business is run through a bank account
That’s just the first part, and HMRC will then take a look at your business’s turnover in the last 12 months. Excluding VAT and the cost of materials your turnover must be at least:
- £30,000 if you’re a sole trader
- Either £100,000 for the whole partnership, or £30,000 for each partner
- Either £100,000 for a whole company, or £30,000 for each director of a company (if the company is controlled by 5 people or less, an annual turnover of £30,000 is needed for each of them)
What are the advantages of gross payment status?
Having gross payment status can be good for your reputation in the construction world, showing other contractors that you’re both reliable and trustworthy, according to HMRC anyway – which is a good source!
It can also help with your business’s cash flow.
As a subcontractor, you have 3 options:
- Don’t register for CIS and have 30% deducted from your payments
- Register for CIS and have 20% deducted
- Get gross payment status and have zero deductions, putting money aside to pay your tax bill at your own pace
You’re registered for CIS, so the contractor you work for deducts 20% each time they pay you.
However, these deductions don’t take into account the £12,750 tax-free Personal Allowance you’re entitled to each tax year.
While you’ll receive this back as a tax rebate, it could cause strain during the year, especially when it comes to paying yourself, any staff you may have, and for any supplies.
If you don’t meet the criteria for gross payment status, registering for CIS is your best option to avoid having an additional 10% deducted from your payments.
How do people with gross payment status pay taxes?
You’ll report and pay your tax bill in the same way as normal. For instance, if you’re a sole trader or partner you’ll submit a Self Assessment tax return, and if you own a limited company you’ll submit a Company Tax Return.
What happens if I lose my gross payment status?
HMRC will review your business each year to ensure you still qualify for gross payment status. If you submit your tax returns and pay on time, this should be pretty straightforward for HMRC to approve – keeping your status active for another year.
However, if you fail to submit your tax returns or the pay the bill on time, HMRC may choose to remove your status.
If this happens you can respond to the notification letter explaining why you disagree. Your gross payment status won’t be removed if they accept your explanation, but if they reject it your status will be removed within 90 days.
If you agree with HMRC’s decision (or if they reject your response to them) you’ll need to wait a year from the date of cancellation to reapply. Before you do this, ensure everything has been submitted and paid in a timely manner, and that your turnover is over the threshold.
Whether or not you need to register for CIS, good bookkeeping is a must! Sign up today for your free Pandle account and see how we can help you!