From 6 April 2024, amendments to the existing Construction Industry Scheme ("CIS") legislation will come into force. Value added tax ("VAT") compliance will now form part of the gross payment status test for CIS. The Government is making this change to increase HM Revenue & Customs' ("HMRC") power to rescind gross payment status to help tackle supply chain fraud within the construction industry.
CIS gross payment status is important for sub-contractors in the construction industry. Without it, contractors making payments to sub-contractors for construction works may be required to make deductions of 20% (assuming that the sub-contractor is still CIS registered) and pay these to HMRC on account of the sub-contractor's tax obligations. This is likely to have significant cashflow and administrative implications on sub-contractors, who often operate on tight margins to remain competitive.
CIS does not currently include VAT compliance as part of the tests for gross payment status and therefore sub-contractors should consider reviewing their VAT (and overall tax) compliance now. If CIS sub-contractors fail the tax compliance tests for gross payment status, HMRC may refuse CIS gross payment registration applications, or withdraw CIS gross payment registration status from sub-contractors.
Contractors should already be verifying the registration status of their sub-contractors before making any payments to new sub-contractors or sub-contractors that have not been included on a CIS return in the last two years. The upcoming changes make this verification process even more important. If a sub-contractors registration status changes, HMRC will notify contractors that have verified or used a sub-contractor in the current or previous 2 tax years of the change. Contractors should be alert to these notifications as the chances of cancellation of gross payment status will increase as a result of these changes.
HMRC already has broad powers to rescind CIS gross payment status if it appears to HMRC that a CIS registered sub-contractor no longer meets the compliance tests for registration for gross payment status. By adding VAT to the gross payment status compliance tests, HMRC's powers will be significantly extended, and relatively minor non-compliance could result in gross payment status being revoked.
The Finance Act 2024 and amendments to the existing CIS regulations have aligned the tests for VAT non-compliance with the pre-existing tax compliance related tests for CIS gross payment status.
Sub-contractors with gross payment status should therefore be aware that, under the Government's new proposals, a few slightly late VAT returns in a 12 month period could lead to their gross payment status being revoked.
For example, one VAT return more than 28 days late or three late VAT returns filed one day late in a 12 month period could result in the loss of CIS gross payment status. Equally, CIS gross payment status may be lost if a sub-contractor is more than 14 days late in paying VAT of more than £100 to HMRC.
DWF responded to the consultation on the draft legislation HMRC published and asked HMRC to consider raising the non-compliance threshold. However, the Government has not changed its stance and has applied the stringent CIS gross payment registration tests that apply to other taxes to VAT compliance too. HMRC have advised in its responses to the consultation process that the powers to remove gross payment status will be reserved for those who as "seriously non-compliant" but what this means in practise is not certain.
If you need more information or would like to know how this change will impact you or your business, please contact our tax team.
To find out more, please contact, Alex Tolcher and Douglas Pyrke or speak to your regular DWF contact.
