Insights

The Construction Industry Scheme (CIS) rules are known for being complex and burdensome,  so a new consultation launched by HMRC to try and simplify things is being widely welcomed. This latest consultation into practices for construction businesses was published on 27 April 2023.  

The construction industry continues to suffer with a poor reputation for tax fraud and underpayment of tax which is the reason that the CIS rules were introduced. Despite the operation of CIS, HMRC continue to regard the sector as a high risk and are continually focused on reducing the tax gap, whilst recognising the burden that the extra record-keeping and administrative processes create for businesses within the construction industry.

This latest consultation will close on 20 July 2023 and primary areas of focus include the following:

Abuse of the CIS

HMRC is concerned about the abuse of the CIS in relation to VAT. In particular the use of gross payment status (GPS) to facilitate supply chain fraud. To combat this, HMRC is consulting on the following:

• introducing VAT compliance to the compliance test for GPS applications;
• mandating the GPS applications process.

VAT compliance test

The VAT domestic reverse charge was introduced to combat VAT fraud within the supply chain and although it is having a positive impact, it does not cover all aspects of the supply of goods and services within the sector.  HMRC consider that labour fraud, which involves creating false invoices to pass payments down contrived supply chains, continues within the industry and not only results in an uneven playing field between those compliant and non compliant contractors, but also a loss of tax.  

Compliance history review

Once a subcontractor gains GPS (gross payment status) they are subject to an  annual automated tax treatment qualifying test (TTQT). Where the check identifies a compliance failure within the previous 12 months the subcontractor’s GPS may be withdrawn.

As part of the consultation, HMRC is proposing to bring forward the initial  TTQT and run it after six months; assuming full compliance the review would then revert to an annual basis.

GPS application process

Contractors wishing to obtain GPS can apply by either completing and submitting the relevant application form or by calling the CIS helpline. HMRC has identified that the helpline route is often the preferred option for VAT fraudsters because it’s harder for officers to scrutinise the evidence in support of the application. One proposal being considered is for the helpline to be retired so that all GPS applications must be submitted online.

Scope of CIS

As certain types of construction work are within, and some are outside of, the scope of CIS many businesses main complaint is that the scope of CIS is confusing, resulting in an entirely innocent lack of compliance. As a result HMRC are seeking views and suggestions on how the scheme could be simplified both in terms of scope and administration.

Addressing these issues in this latest consultation is being welcomed within the industry as it's generally considered that CIS can be very confusing to operate and that any steps to simplify or clarify the rules would be helpful.  

If you own a construction business and would like support with tax and accountancy, please contact us via partners@rjp.co.uk.