Changes to Construction Industry Scheme compliance checks

Navigating the complexities of the Construction Industry Scheme (CIS) can be a daunting task for contractors and subcontractors alike. With the ever-evolving landscape of tax regulations, staying compliant is more crucial than ever. Recently, HMRC has introduced significant changes to CIS compliance checks that could impact how you manage your construction business.

Under the CIS, contractors must withhold deductions from payments made to subcontractors who do not hold gross payment status (GPS) at either:

• 20% (the standard rate),
• or 30% (if the recipient is not registered for CIS or cannot be verified).

To obtain GPS and therefore receive payments without any deductions, subcontractors must meet certain requirements. One of these (the ‘compliance test’) includes that all CIS and direct tax returns and payments (excluding certain income tax and corporation tax self-assessment payments) must be:

• correct; and
• submitted by the applicable deadlines.

HMRC performs an annual automated compliance check to establish whether the subcontractor still qualifies for GPS. If the subcontractor does not comply with its relevant tax obligations, HMRC can withdraw GPS. The subcontractor then cannot reapply for GPS within 12 months.

Finance Act 2024 changed the GPS tests from 6 April 2024. In particular, VAT returns and payments are added to the compliance test for GPS status to be obtained and kept by a subcontractor.

Any VAT failures that occur prior to 6 April 2024, however, will not be considered as grounds to cancel GPS for existing holders.

Other GPS changes include:

• advancing the first compliance check for GPS holders to six months after application (currently it is 12 months); and
• changing how to apply for GPS, by introducing digital applications.

Subcontractors who currently hold (or plan to apply for) GPS should review their VAT compliance to check whether they are at risk of having their GPS withdrawn or an application refused. We can help you with this.

More on the CIS

Regulation 9 of the 2005 CIS regulations allows HMRC to issue a direction that relieves a contractor of their CIS liability where certain conditions are met. This includes where the failure to make a deduction arose from:

• an error made in good faith; or
• a genuine belief that the payment was outside the scope of CIS.

However, the contractor must have taken reasonable care to comply with the CIS regulations for this to apply. In a recent case, the appellant (which provided the labour of tradespeople) was found not to have taken sufficient care. This was due to a lack of oversight at director level.

The person who had overseen compliance, including CIS returns, for the firm had retired. He handed over duties to the office manager, who had previously assisted him. A few years later, the company started work with some new clients. The office manager confirmed the CIS status of each with HMRC. They should have been subject to CIS deductions. However, the appellant made payments gross and filed CIS returns on that basis. HMRC sought to recover almost £450,000 of underdeducted CIS tax and imposed penalties.

The Tax Tribunal said that there were no checks or controls on the office manager’s CIS compliance. This was for substantial payments, of over £700,000 in 2015/16. Failing to comply with the CIS regulations would have a significant impact on the company. Due to the lack of controls and checks, the appellant had not acted with enough reasonable care to comply with the regulations. A Regulation 9 direction to relieve it of its liability was therefore inappropriate.

If you’re looking for guidance on navigating the Construction Industry Scheme, Carpenter Box is here to provide expert guidance and advice tailored to your needs.

Reach out to our Construction and Real Estate team on 01293 227670 for further information or personalised assistance.