Gross Payment Status: Don’t pay, HMRC will take it away

Rhian Lloyd, Employment Tax and HR Manager at Aspire Business Partnership, explains the different scenarios where HM Revenue and Customs (‘HMRC’) can revoke a subcontractor’s Gross Payment Status (‘GPS’) under the Construction Industry Scheme (‘CIS’).

Background

GPS is valuable to subcontractors within construction supply chains. Contractors may choose to work  only with subcontractors who have gross payment status on the basis that;

• it is less administration from their point of view,
• there is less chance of making an error in completing their contractor obligations, such as making deductions and reporting these on CIS returns, and,
• importantly, since the amendment of the CITB Levy, there is no CITB Levy due on payments made to subcontractors with GPS whilst the levy is payable on 1.25% of payments made to net status subcontractors. Therefore, this represents a significant cost saving.

GPS Revocations – what does the legislation say?

Section 66(1) of the Finance Act 2004 (‘FA 2004’) determines that registration for GPS can be cancelled with effect from the end of a prescribed period in the following circumstances;

1. Where, if an application to register for GPS was made at that time, the Board would refuse the application;
2. An incorrect return or incorrect information has been provided in relation to the CIS and contractor obligations; or
3. Failure to comply with contractor or subcontractor obligations.

The “prescribed period” is defined in section 67(5) of the FA 2004 which confirms that, where there has been an appeal against the cancellation of registration for GPS, the cancellation of registration does not take effect until the latest of; the abandonment of an appeal, the determination of the appeal by the High Court (in England and Wales) or the determination of an appeal by the appropriate court. Where the withdrawal of GPS is upheld, the subcontractor must then register as net status.

There are some circumstances when HMRC have the power to cancel GPS with immediate effect which are detailed at section 66(3) of the FA 2004. details. as follows;

1. GPS was accepted on the basis of information which was false;
2. Fraudulently making an incorrect return or providing incorrect information when completing contractor or subcontractor obligations; or
3. Knowingly failing to comply as a contractor or subcontractor.

Where a decision is made under section 66(3) and GPS is revoked with immediate effect, the subcontractor is able to be registered as net status moving forwards if HMRC thinks fit.

Subcontractors are not able to re-apply for GPS within one year of the cancellation taking effect.

Examples of GPS revocations

It is one of our favourite phrases at Aspire, but compliance is key when it comes to the CIS and GPS. When you have successfully been granted GPS having met the requirements under the business, turnover and compliance tests, you need to ensure that you keep hold of it for the foreseeable future with no hiccups along the way.

HMRC correspondence regarding a GPS revocation usually states how HMRC review subcontractors over 12 month periods and detail any compliance failures found within that period. We have seen HMRC threaten to revoke GPS for an unreceived corporation tax return, a late submission of contractor return and failing to submit contractor returns.

However, before revoking GPS, HMRC allow the opportunity to explain why the failure occurred to try to identify if there is a “reasonable excuse”. HMRC will assess this and decide if there was a reasonable excuse for the compliance failure. Without a response, HMRC will come to their decision as to whether GPS should be revoked or retained from the compliance failure only.

The highly publicised case of JP Whitter (Water Well Engineers) Limited (‘JPW’) serves as a powerful reminder that there is a need for continuous compliance in the CIS, following JPW being denied their final attempt to challenge the cancellation of their GPS by the Supreme Court. The Supreme Court concluded that JPW failed to comply with the requirements of the CIS without reasonable excuse.

HMRC penalties

Not only could you have your GPS revoked, HMRC Factsheet CC/FS41 also sets out the penalties that you could receive. These penalties would apply if false information or documents have been provided to HMRC in order to become registered under the CIS, regardless of whether this was for gross or net status. The penalty sum and the reason for being charged are as follows;

Penalties may be appealed within 30 days.

HMRC may carry out a criminal investigation with a view to prosecution if there has been something deliberately done wrong.

Meet your obligations under the CIS

The construction industry seems to be high on HMRC’s agenda currently. We are seeing HMRC CIS enquiries, HMRC employment status enquiries, the consultation surrounding the VAT reverse charge and HMRC interest in relation to conducting due diligence on your supply chain, particularly when it comes to labour suppliers (such as employment agencies and contracting intermediaries).

This list is not exhaustive, however it contains some contractor obligations that must be met;

• Determine whether subcontractors fall within the scope of the CIS
• Verification of subcontractors
• Applying the appropriate deduction to payments
• Submitting CIS returns (to include payments to subcontractors with GPS!)
• Comply with all reporting and tax obligations on an ongoing basis by the required deadline (e.g. submit corporation tax returns pay PAYE tax and National Insurance Contributions)

Please contact Aspire if you are unsure of your compliance obligations under the CIS on the basis that failures could lead to the revocation of GPS, which, as I am sure anyone in the industry will know, is detrimental to a subcontractor in the construction industry, both financially and reputationally and could ultimately lead to the continued success or the inevitable failing of a subcontractor.

Similarly, please do not hesitate to contact us should HMRC write threatening to revoke your GPS or if you are net status and wish to apply to become GPS.