The Bank of England has announced that things will get worse for the economy before they get better. As the purse strings tighten and companies perhaps give more thought to creditor payment terms, the issue of cashflow is likely to be a big one.

For subcontractors within CIS, the consequences of putting HMRC and their obligations under the Scheme too low on the priority list could be significant.

It has now been almost a year since HMRC introduced its annual compliance review for gross payment subcontractors, also known as the TTQT (Tax Treatment Qualification Test). This is an automated check on whether a subcontractor has complied with all of its tax obligations, including those of an employer or contractor if appropriate, in the 12 month period leading up to the review. Subcontractors will not be aware when their reviews are being carried out, but can be assured that if it hasn’t happened yet, it will in the next couple of months, and then the annual process will begin again.

The consequences of defaulting on certain tax obligations would potentially mean the loss of gross payment status, which could be extremely damaging for a business’s cashflow.

HMRC’s own guidance cites the following criteria, any of which will lead to a review being failed:

• Contractor’s monthly return (including nil returns) late on four or more occasions
• One contractor’s monthly return more than 28 days late
• PAYE/CIS deductions late on four or more occasions
• One PAYE/CIS deduction more than 14 days late
• One Self Assessment payment more than 28 days late
• One Corporation Tax payment more than 28 days late
• At the date of the review, overdue form P35 not submitted
• At the date of the review, overdue Self Assessment return not submitted

The Self Assessment criteria do not apply if the business is a company rather than a sole trader.

If the review is failed, HMRC allows a 30 day period of grace from the date of the issue of the failure notice in which to appeal. Gross payment status will be lost after 90 days from the same date unless an appeal is delayed in which case it will be 30 days from the date of the notice of appeal failure.

Generally, HMRC is prepared to discuss payment terms if you are struggling to meet your obligations but these terms should be negotiated in advance of defaulting on payments. If payments are then made within the revised payment terms this should not be treated as a failure when assessing your continued gross payment status.

The message then is simple. Be aware that defaulting on CIS compliance or payments could potentially have a damaging effect on your business and its cash flow.  Putting this in context with HMRC’s risk-based approach to conducting PAYE & CIS reviews, it is vital that your tax affairs remain in order throughout what could be a challenging year to come.