FB 2024: Construction Industry Scheme (CIS) changes

Subcontractors who hold or are applying for Gross Payment Status (GPS) should review their VAT compliance

VAT compliance important for subcontractors

Following HMRC’s consultation earlier in the year, a clause has been included in the Autumn Finance Bill which, if enacted in its current form, will change the CIS Gross Payment Status (GPS) tests. This article summarises what CIS contractors or subcontractors should consider ahead of the proposed change coming into force on 6 April 2024. 

The current position

Under the CIS, contractors and deemed contractors must withhold deductions at either 20 percent (the standard rate) or 30 percent (if the recipient is not registered for CIS or cannot be verified) from payments made to subcontractors who do not hold GPS. These amounts are remitted to HMRC as payments towards the subcontractor’s final tax and NIC liabilities.

To obtain GPS, and receive payments from contractors and deemed contractors without any deductions under the CIS, subcontractors must meet three requirements:

  • They must prove that they operate a business carrying out construction operations, or supplying labour for construction operations, 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 CIS and direct tax returns and payments (excluding certain income/corporation tax self-assessment payments) must be correct and submitted by the applicable deadlines (the ‘compliance test’).

Once granted, HMRC perform an annual automated compliance check to establish whether the subcontractor still qualifies for GPS. If the subcontractor is not compliant with its relevant tax obligations, GPS can be withdrawn. This results in payments to the subcontractor within the CIS being subject to deduction, and GPS cannot be reapplied for within 12 months.

What is expected to change?

If Clause 34 of the Finance Bill is enacted in its current form, the following changes to GPS will be introduced from 6 April 2024:

  • VAT returns and payments will be added to the ‘compliance test’ for GPS status to be obtained and maintained by a subcontractor; and
  • The grounds for immediate removal of GPS in cases of fraud will include fraudulent returns or information provided in respect of any VAT, corporation tax Self-Assessment, income tax Self-Assessment or PAYE obligations.

Any VAT failures which occur prior to 6 April 2024 will not be considered as grounds to cancel GPS for existing holders. However, any VAT failures that arise after this date will be considered for both new applicants and existing GPS holders.

Therefore, subcontractors who currently hold (or plan to apply for) GPS should review their VAT compliance to ascertain whether they are at risk of having their GPS withdrawn or application refused post-April 2024. Any VAT errors identified should be disclosed to HMRC and corrected.

Contractors and deemed contractors will be notified by HMRC if the payment status of any subcontractors they have verified or used in the current or previous two tax years has changed. Where GPS is withdrawn, contractors will be given 35 days’ notice to make any further payments to the subcontractor subject to CIS deductions. Contractors should ensure that they have appropriate processes in place to manage any such changes to payment status.

Whilst not included in the Finance Bill, other GPS changes which will be implemented from 6 April 2024 include:

  • Bringing forward the first compliance check for GPS holders to six months after application (currently 12 months); and
  • Changing how GPS can be applied for with the introduction of digital applications and ceasing to accept telephone applications (except for those who are digitally exempt).

Additionally, the Government confirmed that it will introduce regulations to remove the majority of payments from landlords to tenants from the scope of the CIS.

Please contact the authors or your usual KPMG in the UK contact to talk through any concerns you may have regarding your CIS compliance.