What a difference a day makes...

What happens if a business in the construction industry, currently able to receive gross payments from contractors, pays its tax liability, or any interest due on its tax liability, one day late?

What is gross payment status?
Where a company (or an individual) has gross payment status, any payments made to them by contractors are not required to have tax deducted before payment is made. Without such status, contractors would be required to make any payments, after the deduction of 20 per cent tax. This can be crucial for businesses in the construction sector as their ability to pitch for, or be awarded, larger contracts is often dependent on having gross payment status, as the contractor engaging them does not want the additional administrative burden of having to comply with a scheme of tax deduction.

As a result, loss of gross payment status will not only affect cash flow, but may even prejudice a businesses' future trading capabilities.

The letter of the law
Under the terms of the scheme, any subcontractor holding gross payment status must maintain a near perfect record of tax and National Insurance (NI) compliance to avoid losing its gross payment status. HM Revenue and Customs (HMRC) will periodically review each subcontractor's record, and if any payments or returns are made late and fall outside of the accepted tolerances, gross payment status will be automatically revoked.

The scheme does not allow for HMRC discretion, other than the tolerances specified in the legislation. If payments or returns are made later than these specified tolerances, gross payment status revocation will apply. As part of the reform of the tax tribunal system, a new process of 'internal reviews' of appealable decisions was created in which the taxpayer could ask HMRC for a review of an issue where there is an appropriate dispute. During the internal review trial in Manchester, 40 gross payment status decisions were reviewed, 39 of which were upheld as the reviews were mainly requested on the basis that breaches were caused by the current economic climate. The review team is not empowered to apply the 'common sense' approach that was often applied by the General Commissioners. Therefore, it would seem that the only avenue of appeal open to subcontractors affected is that of an appeal to the Tribunal, under its normal rules.

If a breach occurs, subcontractors will become liable for "payment under deduction". They cannot re-apply for gross payment status until 12 months after losing this status, as any re-application would require a good compliance record for the immediately preceding 12 months.

What can be done?
Once gross payment status has been revoked, unless there are grounds for a valid appeal, which would not include unavailability of funds as, strictly speaking they have already been received from the payer, the scheme rules relating to payments under deduction must be adhered to. Subcontractors should, therefore ensure they have suitable systems in place to be able to meet their liabilities in a timely manner. However, if a subcontractor anticipates there may be an issue with making a payment, provided HMRC is contacted prior to the first due date of payment that may be missed, it may be possible to enter into a Time To Pay (TTP) arrangement. Under such a scheme, provided the agreed payments are made on time, there will be no loss of gross payment status even though the payment period for those liabilities has been extended.

It has been found that on occasion subcontractors who have entered into a TTP arrangement, may still receive letters stating that their gross payment status has been removed. This is as a result of the automated tests and in these cases, an appeal should result in the status being immediately restored.

Kathryn Hiddleston, Tax Partner at Grant Thornton says: "In the current economic climate, more and more subcontractors are feeling the squeeze. It may seem as though paying tax liabilities is less important than paying suppliers or meeting other direct costs, but the knock on effect of missing or delaying a payment can be catastrophic. With ever increasing numbers of subcontractors competing for a smaller pool of contracts, good systems and timely information are crucial in identifying problems before they arise and making necessary arrangements before it is too late."

Contact us if you would like further advice on any of the above.