Subcontractor VAT Compliance and CIS Changes for Gross Payment Status

The Construction Industry Scheme (CIS) in the UK is set to undergo notable changes starting April 2024, as outlined in Clause 34 of the recent Autumn Finance Bill. The CIS applies to contractors and subcontractors in the UK construction industry, governing how payments are made between the two. Under the scheme, contractors must withhold deductions from payments made to subcontractors and remit those deductions to HMRC, serving as pre-payments towards the subcontractors’ overall tax liability. Subcontractors have the option to apply for and maintain Gross Payment Status (GPS), which exempts them from these deductions if specific tests are met and maintained. The upcoming changes primarily relate to stricter requirements around VAT compliance that subcontractors must meet to gain and retain GPS.

Currently, for a subcontractor to qualify for GPS, thus avoiding CIS deductions, they must pass three key tests: the “business test”, the “turnover test”, and the “compliance test.” The business test requires operating a UK bank account through which construction operations are carried out. The turnover test sets minimum net turnover thresholds based on the number of company directors/partners. Finally, the compliance test mandates all CIS and direct tax returns and payments be submitted correctly and on time, excluding certain income/corporation tax self-assessment payments.

Under the new Finance Bill clause, two significant changes to GPS eligibility take effect April 2024. Firstly, a subcontractor’s VAT returns and payments will now fall under the compliance test to get and retain GPS. Any failures to meet VAT obligations can therefore put their GPS status at risk starting next April. Additionally, fraudulent VAT activities may prompt immediate GPS removal on grounds of fraud, similar to fabricated information on other returns like corporation tax. Essentially, VAT compliance now carries equal weight to all other tax compliance in GPS decisions.

These changes mean subcontractors who currently have or plan to attain GPS should urgently review VAT accounting and submission processes to identify and resolve any issues, given the implications non-compliance can hold as of April 2024. Disclosing and correcting any historical VAT errors to HMRC before next April is highly advisable as well, since post-April failures allow cancellation of existing GPS status. For contractors making payments within the CIS, awareness of processes to handle any HMRC notifications around subcontractors losing GPS is also vital. Contractors have 35 days to switch to making deductions on payments to impacted subcontractors.

Beyond VAT-specific changes, other GPS modifications in the pipeline for April 2024 include earlier initial compliance checks at 6 rather than 12 months for new GPS holders, plus mandatory digital GPS applications and barred telephone requests. Separately, CIS will soon exempt most landlord-tenant payments too. Together these represent meaningful alterations to how the UK’s CIS operates, with VAT compliance standing out as the most pressing focus area for current and prospective GPS holders reviewing readiness for April and beyond. Failing on VAT risks access to the significant benefits GPS confers, making reviews and any necessary corrective actions pressing.

Overall the CIS changes, especially around VAT, offer much-needed tightening to ensure the scheme’s integrity and purpose is protected. The CIS fundamentally aims to ensure basic tax compliance within the construction sector, representing one of the largest sources of UK tax non-compliance. Making access to preferential, deduction-free payments contingent on proper VAT accounting alongside other tax liabilities is entirely logical. It brings VAT obligations to the forefront for subcontractors, which compared to other taxes, has witnessed higher levels of non-compliance. Recent estimates suggest the VAT gap between expected and actual revenues in 2019-20 was around 8.2% of total theoretical VAT returns or approximately £27 billion. Stricter GPS tests should spur improved VAT and wider tax compliance.

Naturally, there are counterarguments too around the new VAT emphasis within GPS criteria. Subcontractors might highlight how other schemes like the existing VAT Reverse Charge already mandate tight tax compliance without jeopardising cash flow through upfront deductions. Smaller construction firms especially might cite unfair cash flow and administrative burdens from VAT failures locking them out of GPS. Retaining non-compliant subcontractors within GPS also encourages engagement with tax authorities to correct issues. Construction spans diverse firm sizes and financial strengths, so perhaps a more graduated range of incentives, checks and penalties warranted.

Ultimately though, the incoming CIS changes reflect wider public policy priorities around taxes. For instance, after years of public spending expansion, recouping unpaid taxes remains high on the policy agenda. The tax gap between money owed and collected peaked at £47 billion in 2018-19. While still £35 billion as of 2020-21, closing that gap including through stronger enforcement persists as a priority. The updated CIS bolsters tax compliance and collection among a sector representing one of the economy’s biggest contributors. Beyond raising revenues, promoting tax compliance also aligns with government priorities to engender greater public faith in the fairness and consistency of tax systems. Steering subcontractors towards full tax obligations, rather than preferential Grade-A treatment without complete contributions, helps advance that objective and the CIS policy rationale overall.

In summary, bolstering CIS rules to require VAT compliance alongside other tax liabilities for GPS access makes sense when considering the scheme’s aims, sector nuances, and wider public tax policy landscape the UK government occupies. While valid concerns exist around cash flow and administration, particularly for smaller players, the principle behind elevating VAT to equal status is sound. Subcontractors would be prudent getting their houses in order ahead of April, while contractors must ensure change readiness too for any GPS alterations that arise downstream. Clarity around processes and timeframes following any status changes is vital for minimising disruption. With the right preparations and perspective around why these rules matter, smoother sailing under the new CIS should follow. For an industry nursing recent economic troubles yet holding huge decarbonisation promise, paying its full tax dues provides a reasonable quid-pro-quo towards achieving shared national goals.

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Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.