In her blog on 14 April 2008 Cathy Corns highlighted the risk that some businesses could lose their gross payment status if they are not fully up to date with all their tax compliance. We are now starting to see the results of HMRC’s review of the first 12 months of the new CIS and they appear be applying their rules quite ruthlessly.

HMRC said they would not impose penalties for late returns provided all returns for the first 6 months of the new scheme were submitted by 19 October 2007. Some people may have interpreted this to mean that there was a general amnesty for this first 6 month period and, provided businesses kept up to date after that, they would not risk losing their gross payment status. This is not the case. Our understanding is that HMRC’s amnesty (if it can be called that) applied only to the first 3 months and any late returns made after June 2007 will result in the business being transferred to a net payment status. This could have a disastrous effect on cash flow, especially if the tax deducted cannot be recovered in full until after the end of the tax year.

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The way the new rules work it is likely that a number of businesses may be moved from gross to net under CIS. There is a reason to be worried.

One of the key aims of the new CIS scheme was to improve compliance in the construction industry.

Under the new scheme, HMRC may raise a determination transferring a subcontractor from gross to net payment status at any time if HMRC believes that were the subcontractor to apply for registration for gross payment at that time this would be refused.

From last year HMRC has a programme for businesses to review their tax compliance over the previous 12 months. If there are unacceptable breaches the businesses receive a determination moving them to net status and notice of right of appeal. This is a rolling programme to ensure every business is checked once a year.

To pass the compliance test, the trader and any business partners (or the company and each of its directors) must, during the 12 months up to the date of the application, have done all of the following subject to some small margins for error.

• Completed and returned all tax returns sent. 
• Supplied any information to do with the tax that may have been requested. 
• Paid by the due dates 
  • all tax due personally or by the business
  • all National Insurance contributions (NICs)
  • any PAYE tax and NICs due as an employer
  • any deductions due as a contractor in the construction industry.

This is likely to be a real problem for businesses.

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There are some important changes to the Construction Industry Scheme (CIS) starting this month:-

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