When HMRC gets Construction Industry Scheme Gross Status Wrong – Peter Knibbs – partner – BPE Solicitors LLP

Losing “gross status” under the government’s Construction Industry Scheme (“CIS”), or having it wrongfully taken away by HMRC, can have a devastating impact on your business. However, there are steps you can take to challenge their decision. Find out more below.

At BPE, we understand how important the allocation of gross status is (under the government’s Construction Industry Scheme (“CIS”)) for our clients in the construction industry, and the devastating impact its removal (or even undue delay in it being granted) can have, ranging from day-to-day cash flow issues to long-lasting reputational damage.

We have experience in successfully advising clients with claims against HMRC for the wrongful cancellation of their gross status under the CIS scheme, and we would like to share with you what your business can do in these circumstances.

What is CIS and what is gross status?

CIS is a special tax deduction scheme which sets out a framework for deducting tax at source for certain payments relating to work undertaken in the construction sector, usually by sub-contractors. It was primarily introduced to counter tax evasion in the construction industry.

Subcontractors who register under CIS are given one of two payment statuses, either net or gross payment status. Unregistered subcontractors will only be paid once the main contractor withholds 30% tax. The deductions count as advance payments towards the subcontractor’s tax and National Insurance payments.

Net payment status allows payment for work done with a 20% deduction (VAT and the cost of materials can be paid without tax deduction) and gross payment status allows contractors to pay subcontractors without any tax deduction. In other words, under gross payment status, subcontractors are trusted to pay their own tax liabilities on the normal due dates for income or corporation tax (i.e., the CIS tax rate is effectively 0%).

Subcontractors need to meet special requirements to register for this preferred status, which can be found on the government website. The main benefits for registered entities are improved cash flow and being able to spread the cost of tax and NI across the course of the year.

When can gross status be lost?

Unfortunately, it is possible to lose gross status, which can have a devastating impact on your business, and HMRC appears to have a wide discretion in their ability to cancel gross status. It is also noteworthy that HMRC is not required to consider the financial consequences of cancelling a sub-contractor’s gross payment status when deciding whether it should do so. However, HMRC do have to ensure that they act consistently with the objectives of the scheme, and in line with the statutory framework.

Specific reasons for cancelling gross status include where a subcontractor has made an incorrect CIS return or provided incorrect information. HMRC continuously review gross payment status holders and can revoke status at any time.

If HMRC decides that gross status should be removed, it must send the effected subcontractor a letter without delay, which will set out the reasons for revoking gross status and the deadline for appeal. Unfortunately, we encounter scenarios where this letter is never received, and a subcontractor only becomes aware of its loss of gross status when notified by its customers. In this situation, we advise clients to immediately contact HMRC who should then temporarily reinstate gross status until an appeal is decided or the time limit for appealing has expired.

Subcontractors may by notice appeal to HMRC outlining why it considers registration should not have been cancelled.

Are there any claims that can be brought against HMRC?

Evidently, loss of gross status can have damaging consequences on a subcontractor’s reputation because, for example, it flags to the industry that a particular subcontractor cannot be trusted to pay its taxes on time. This may result in the loss of clients and ultimately the closure of the business.

Whilst HMRC have a wide discretion in determining whether an organisation should have gross status, and whether they are entitled to retain it, there are possible claims that be brought against it where it makes the wrong decision.

If HMRC does not comply with the statutory duties placed upon it, and if that non-compliance causes a taxpayer loss, then in some circumstances the taxpayer can claim damages for loss of profits.

Given the complexities of this area of law, we would strongly recommend that you take prompt specialist advice if you feel your company has been wronged by HMRC is this respect.

Therefore, whilst it possible to consider a claim against HMRC if something goes wrong, of course the best advice is to take every step possible to avoid being in a position where HMRC decides to remove gross status in the first place.

You may wish to regularly audit your CIS compliance, and ensure you are meeting the rules to the letter. This will include ensuring that CIS returns are accurate, and all relevant information is provided accurately, and your business complies with all the provisions the CIS requires.

However, if you do require any specialist advice in this area, please do contact Peter Knibbs, a partner in BPE’s Commercial Litigation Team.

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