Construction Industry Scheme: proposed reforms affecting subcontractors

Could VAT compliance jeopardise your Gross Payment Status? Let’s take a look at HMRC’s proposals

Construction Industry Scheme proposed reforms

HMRC are consulting on tightening the conditions subcontractors must meet to obtain and maintain Construction Industry Scheme (CIS) Gross Payment Status (GPS). If these proposals are taken forward in their current form, HMRC estimate that around 16 percent of subcontractors who currently hold GPS status would no longer qualify based on their VAT compliance. This article summarises HMRC’s proposed changes to the GPS tests, and what subcontractors need to consider. Please also see our companion article on proposed simplifications to the CIS regime which form part of the same consultation.

What’s the current position?

Under the CIS, contractors and deemed contractors must withhold CIS deductions (e.g., at a rate of 20 percent or 30 percent) from payments made to subcontractors who do not hold GPS. The amounts withheld are paid to HMRC as advance payments towards the subcontractor’s tax and NIC liabilities.

To obtain GPS, and qualify to receive payments from contractors and deemed contractors without any CIS deductions, subcontractors must meet the following three tests:

  • They must prove that they operate a business carrying out construction operations, or supplying labour for construction operations, which operates through a UK bank account (the ‘business test’);
  • Their net turnover for the previous 12-month period must be at least £30,000 per director or partner, or over £100,000 for the whole company or partnership (the ‘turnover test’); and
  • All their CIS and direct tax returns and payments (excluding certain income/corporation tax self-assessment payments) must be correct and submitted by the relevant deadlines (the ‘compliance test’).

Once granted, HMRC undertake an automated annual compliance check to confirm whether the business still qualifies for GPS. If the business is not compliant, GPS can be withdrawn, resulting in payments being made subject to deduction. GPS cannot be reapplied for within 12 months. 

What are the proposed changes?

HMRC have identified cases where organised criminal groups fraudulently obtain GPS status for contrived supply chains which results in both lost CIS deductions and VAT. At present, the compliance test does not consider any VAT failures when a subcontractor applies for GPS, or as part of the annual compliance check thereafter. HMRC are seeking views on whether VAT should be included as a relevant tax for the purposes of the compliance test.

Additionally, HMRC propose beginning automated annual compliance checks six months (rather than 12 months) after GPS is first granted. This is intended to identify sooner the businesses who quickly become non-compliant.

Finally, how GPS can be applied for is under review, with a power for HMRC to require digital applications being considered to allow for detailed checks which are currently not possible with telephone applications. 

What should subcontractors consider?

HMRC estimate that approximately 16 percent of the active GPS population would currently be non-compliant on VAT grounds, but most of these subcontractors should qualify for GPS by complying with their VAT obligations in a timely manner.

Subcontractors who hold (or plan to apply for) GPS should consider their VAT compliance to ascertain whether they are at risk of having their status withdrawn or refused if the proposed reforms are introduced.

Any barriers to timely VAT compliance that businesses are facing, but cannot resolve, can be raised with HMRC as part of the consultation process.

What happens next?

This consultation closes on 20 July 2023. Please contact the authors, or your usual KPMG in the UK contact, if you would like to talk through what the proposed reforms might mean for you, or if you have any points you would like us to consider reflecting in any consultation submissions that we make to HMRC.

HMRC will publish the consultation outcome and confirm what proposals will be taken forward later this year.