Date: 11 June 2009
For subcontractors working within the Construction Industry Scheme (CIS), being paid gross without 20% tax deductions at source, is often of fundamental importance to the health of their business. This is not only in terms of the cashflow disadvantage and the ability to pay wages and suppliers, but also because subcontractors, who do not meet the strict tax compliance requirements to obtain and retain gross payment status, may find that many potential contractors will refuse to give them work. The loss of gross payment status can have a potentially disastrous affect on their ability to carry on business.
To achieve gross payment status, a subcontractor must consistently meet all its tax compliance obligations. HM Revenue & Customs (HMRC) applies the late payment rule inflexibly and without discretion, so the number of contractors losing their gross status is very high - between 30-40% of those considered for review each month.
As a business, Vantis is very aware of the everyday pressures our clients experience, and that it is sometimes very difficult to always meet the exacting standards of compliance HMRC insists upon. Because we take time to know not only our clients and their business, but also the legislative environment in which they operate, we have successfully challenged HMRC’s decision to withdraw gross payment status from two of our clients in recent months.
Our first client employs over 100 staff and apprentices; turnover of £7m derives from the installation and maintenance of plumbing and heating systems for various local authorities, housing associations and similar organisations and was suffering from late payment for work performed. Faced with a choice between paying HMRC or their suppliers and staff, our client made a commercial decision. HMRC identified 11 compliance failures relating to the late payment of monthly PAYE remittances and gave notice of its intention to withdraw gross CIS payment status. Our client particularly feared that loss of gross payment status would seriously compromise its ability to retain or tender for contracts, and that it would have to lay-off staff.
Our second client installs and maintains lifts, turning over £0.3m. HMRC identified 8 compliance failures relating to late payment of PAYE liabilities and gave notice of withdrawal of gross CIS status. With no access to credit, the imposition of 20% tax deductions would have seriously impacted the ability to purchase materials and pay subcontractors, and the business would have probably folded.
Unable to move HMRC through reasoned arguments that our clients had a ‘reasonable excuse’ for their actions, we had no option but to ask The General Commissioners – an independent tax tribunal made up of local business people – to judge the merits of our clients’ cases.
We persuaded the Commissioners that our clients did indeed have a ‘reasonable excuse’ – in the first instance, the effect of late payment of our client’s invoices on the availability of cash to pay its liabilities, and in the second, the loss of a key member of office staff. Crucially, we were also able to demonstrate that action had been taken to prevent a repeat of the failures. In consequence, both our clients were able to retain gross payment status.
A note of caution, though! The General Commissioners ceased to exist on 31 March 2009, to be replaced with new, more formal tribunals. We have yet to see how the new tribunals will operate in practice and how sympathetic to business it will be, but we will be watching closely.
For further information about how we can help you and your business, please contact Peter Davies or your usual Vantis Client Partner.