HMRC have published responses to their earlier consultation ‘Construction Industry Scheme reform’. The consultation focused on three areas within the Construction Industry Scheme (CIS): compliance, administrative easements and simplification. As a result of the consultation, several changes have been announced.
Compliance: strengthening the Gross Payment Status (GPS) test
- The majority of respondents were in favour of adding VAT to the Construction Industry Scheme (CIS) GPS test, providing that minor VAT failures and errors would not result in GPS refusal or removal.
- Most replies welcomed a shift to digital applications, seeing them as more efficient and user-friendly.
- An overwhelming majority of respondents felt that landlord-to-tenant payments should not be in the scope of the CIS, due to the complexity this creates.
- The general view was that property and construction groups were most impacted by spasmodic reporting obligations and excessive returns.
- The majority of respondents felt that a CIS grouping arrangement was the best solution to reduce administrative burdens for group companies operating CIS.
- Views were mixed as to where responsibilities in a grouping arrangement should sit and whether the process of a grouping arrangement should be statutorily prescribed by HMRC.
- The majority opinion was that intra-group transactions should be excluded from the CIS group return.
- Administrative issues were raised by respondents including how the verification of subcontractors would work and whether non-corporate entities should be included in grouping.
A number of areas for improvement and simplification within CIS were suggested by respondents.
- Areas of uncertainty within CIS were raised.
- These included the extent of statutory exclusions from the CIS; requirements for CIS registration, electrical charging points, modern methods of construction and interactions with the Domestic Reverse Charge.
- It was suggested that many existing processes could be digitised, such as CIS registration and deregistration, along with payments for subcontractors and payment deduction statements.
- Suggestions for new digital processes included:
- Allowing contractors to check the status of subcontractors ahead of engaging them or making payments.
- Notifying businesses of status changes of subcontractors between net and gross payment status.
- Wider suggestions for simplification included a review of whether nil returns need to be filed and whether the six-month period of notifying inactivity could be improved.
- Many respondents raised issues with deemed contractor rules and the burdens this creates, particularly where the majority of payments are exempt from the scope of the scheme.
Following this consultation, it was Announced at the 2023 Autumn Statement that from 6 April 2024:
- Compliance with VAT obligations will be added to the GPS compliance test.
- Regulations will set out VAT compliance failures which can be overlooked, including the number of days returns and payments are made late and on how many occasions.
- Where there is a reasonable excuse for errors, GPS will not be removed.
- Small businesses which are not VAT registered will not be denied GPS on those grounds.
- The grounds for immediate cancellation of GPS will be expanded.
- VAT, Income Tax Self Assessment, Corporation Tax Self Assessment and PAYE will be added to the taxes where HMRC can immediately cancel GPS if they have reasonable grounds to suspect that the taxpayer has fraudulently provided an incorrect return or information.
- The majority of payments from landlords to tenants will be removed from the scope of CIS.
- The first review of a GPS holder’s compliance history will be brought forward from 12 months after application to six months, with annual reviews thereafter.
- A digital application process for CIS registrations will be introduced alongside the existing postal process.
- Telephone applications will only be available to the digitally exempt.
- Digital will ultimately be mandated as the only channel for CIS applications.
No legislation will be introduced to give effect to grouping arrangements as no effective and timely way to do so has been identified.
Further future changes are planned. These include:
- Guidance will be issued on areas of uncertainty around the scope of CIS.
- Other options to reduce the impact of CIS on groups will be explored.
Useful guides on this topic
CIS: Contractors and Subcontractors
What is the Construction Industry Scheme? Who does it apply to? How does it work?
CIS: Construction Industry reverse charge
What is the CIS VAT reverse charge? How do you account for VAT? Can you still cash account for VAT? What administrative changes do I need to operate the reverse charge?