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HMRC internal manual

Construction Industry Scheme Reform Manual

HM Revenue & Customs
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Register and maintain subcontractor: Appeals against refusal or cancellation of Gross Payment Status: subcontractor claims cash flow difficulties

CISR48600 Action guide contents

Very rarely, you might find that the tribunal appears to be sympathetic towards businesses that pay late because of cash flow difficulties caused by the subcontractor’s clients being late with their payments. In order to counter this natural sympathy it is often helpful to know why a subcontractor was unable to make specific payments of tax by their due dates.

Cash-flow problems are generally only accepted as a ‘reasonable excuse’ where the subcontractor could clearly demonstrate that this was due to the unexpected failure of one or more of their contractors’ businesses or sudden difficulty in arranging finance, where the general background was one of good compliance.

Where a subcontractor has missed a payment, or payments after 1 June 2008, and claims, as a reasonable excuse, that it was due to cash-flow problems, you can take a more sympathetic view where the subcontractor has some evidence of general financing difficulties, and has had a reasonably good payment record, prior to that date.

We suggest that you should

  • ask the appellant to provide evidence in mitigation and, in particular,
  • enquire as to why they were not able to obtain short term authorised borrowing to meet their obligations on time.

If the reason is that the bank was unwilling to lend the necessary amounts, then it may demonstrate that there is doubt that the business will be likely to comply with its obligations in the future, this should be brought out during any tribunal hearing.

Subcontractor claims they cannot survive with ‘Net payment status’.

Alternative to the above, appellants may argue that with low profit margins in construction, the issue of net payment status and resulting deduction undermines their cash flow and that the deduction bears no relation to the company’s ultimate CT liability. In order to address this issue, the legislation was changed from 6 April 2002 by FA02/S40 (now FA04/S62) to allow subcontractor companies to offset their CIS deductions against their monthly/quarterly PAYE, NIC and other liabilities for 2002-03 onwards. However, it is clear that many company subcontractors are still not aware of the help given to companies who have deductions made from their CIS income.

For a company that previously held gross payment status it will help the tribunal if you prepare a schedule showing how minimal the effects of the company’s loss of gross payment status might actually be.

Where you decide to take this approach, you should agree the schedule with the subcontractor company, or its agent, before the Hearing takes place.

In many cases, the projected CIS deductions will be less than a company’s monthly PAYE/CIS liabilities and therefore any adverse cash flow would be minimal or non-existent. But, setting the information out in a table as suggested above enables you to show far more easily how minimal the effects of losing gross payment status would be on a company’s cash flow position.

You should note, however, that these provisions do not apply to individuals and partnerships and in some cases where the subcontractor is a large unincorporated business a submission under CISR48130 will be appropriate.