Construction Industry Scheme (CIS) – Changes from 06th April 2024

Following a period of consultation with the industry and professionals, with the aim to reform the existing CIS rules, HMRC have issued guidance as to what these various changes will be.

Gross payment Status – Compliance Test

Gross Payment Status allows the contractor to receive full payments without having to deduct CIS/tax, this obviously improves cashflow and simplifies transactions and gross payment status is what most contractors seek to achieve.

The previous compliance test required proof that the business had :-

1. Filed and paid tax and National Insurance/PAYE on time in the previous 12 months (the compliance test)
2. That the business falls under the CIS regime and has a bank account (the business test) and
3. HMRC would review accounts for the last 12 months, with turnover of at least of £30k if a sole trader, partnership/per partner or company (the turnover test).

New VAT Compliance Test

The new, additional test relates to VAT compliance.  The contractor therefore needs to ensure their VAT returns are filed and paid on time in order to meet the new Gross Payment Status tests.

Errors do happen and the new tests are not designed to fail contractors who have identified errors on their VAT return and submitted voluntary disclosures, the test is more focused on compliance failings such as late filing/late payment and does offer some flexibility to avoid removing contractors from the scheme for minor non-compliance :

1. Contractor can file up to 3 late submission of VAT returns but only if no more than 28 days late or
2. Contractor can make a late payment but only where the VAT liability is less than £100 and paid no more than 14 days late.

This would therefore not penalise contractors who are in a regular refund position (due to domestic reverse charge for construction services) or who are occasionally late with their VAT return. 

If a contractor is aware of potential issues whether it is late payments, missing returns or other historical anomalies, they should look to correcting these historical issues as soon as possible, else it may open the door for HMRC to withdraw or refuse Gross Payment Status.

When do the new, additional VAT compliance test apply?

The new rules apply from 06^th April 2024 for all new applicants, bearing in mind the compliance tests look at the previous 12 months compliance of the applicant.

For existing contractors already operating gross payment status, the new rules apply from 06^th April 2024, so as long as the contractor maintains compliance with the existing tax/PAYE and new VAT rules then their status should remain unaffected.

Clearly the addition of this VAT test is designed to combat fraud and major non-compliance, holding gross payment status is a desirable position, contractors should therefore ensure they are compliant if they are to retain that coveted status.

Checking Gross Status

Also don’t forget that other contractors may fall foul of these new rules and so whilst your business status may not change, the status of sub-contractors or other suppliers may change.

Contractors should always check via the HMRC website as to whether a contractor is gross status or not, but those checks may not always take place when using the same suppliers/contractors on a regular basis, but with these new changes now in effect, it is worth re-verifying contractors.

Where a contractor comes off gross payment status, they have up to 35 days to revert to making deductions on payments, so the impact of the new VAT test may not filter through for a couple of months, depending on how quick HMRC are in performing their checks.

Annual review and Appeals

HMRC review gross status applications on a 12 month basis, but the guidance indicates that for new applications, the first review will be after 6 months and then switch to the normal 12 month review thereafter, new applicants really do need to get their compliance right or lose their status.

All the usual appeals process remain as before, giving contractors the opportunity to appeal any decisions made by HMRC.

There are some other minor changes regarding landlords and tenants and mention of the CIS application process being completed online.  Link to the legislation and guidance can be found here.

Get in Touch

For further information on the recent guidance and changes in CIS rules and related VAT matters, or any other VAT issues, please feel free to get in touch with our VAT experts.

Photo by Joe Holland on Unsplash