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HMRC issues guidance on CIS changes

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HMRC has issued guidance on the changes to the Construction Industry Scheme (CIS) rules from 6 April 2024.

16th Apr 2024
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Following a period of consultation with the industry and professionals, with the aim of reforming the existing Construction Industry Scheme (CIS) rules, HMRC has issued guidance in the agent update on the various changes.

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 so gross payment status is what most contractors seek to achieve.

The previous compliance test required proof that the business:

  1. had filed and paid tax and national insurance/PAYE on time in the previous 12 months (the compliance test)
  2. falls under the CIS regime and has a bank account (the business test)
  3. would be reviewed by HMRC for the past 12 months, with turnover of at least £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. The contractor can file up to three late submissions of VAT returns but only if no more than 28 days late, or 
  2. the 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 does the new additional VAT compliance test apply?

The new rules apply from 6 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 6 April 2024, so as long as the contractor maintains compliance with the existing tax/PAYE and new VAT rules 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, so 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 while 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. However, 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 is in performing their checks.

Annual review and appeals

HMRC reviews gross status applications on a 12-month basis, but the guidance indicates that for new applications, the first review will be after six 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 processes 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. Legislation and guidance is available on gov.uk.

Replies (13)

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By FactChecker
16th Apr 2024 18:41

".. with these new changes now in effect, it is worth re-verifying contractors .."

Beautifully understated 'advice' there ... it would certainly be sensible, but how often?
In theory I guess 'every time you are about to pay them' - but realistically that's a headache easy to 'not bother with this time', which of course then becomes every time if contractor is known to you.

In these skill scarce times you don't want to jeopardise the goodwill established over years with Jo, so that doesn't encourage extra effort/delays in admin/accounts either.

Do you happen to know if HMRC wrote direct to everyone who operated CIS last year?
Putting it in Agent Update (at the very last moment) won't notify everyone who needs to know!

Thanks (5)
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By Paul Crowley
17th Apr 2024 00:36

Much appreciated.

Thanks (1)
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By johnward
17th Apr 2024 08:11

Is HMRC going to pay us to verify the subcontractors again?

Thanks (4)
Replying to johnward:
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By johnjenkins
17th Apr 2024 11:28

and again and again and again.

Thanks (1)
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By rememberscarborough
17th Apr 2024 16:38

Always wondered why this tax has be specifically about the construction industry. It's almost as if HMRC don't believe folk in other industries are anywhere near as dodgy.

Think a quick glance at the business news would prove otherwise on a regular basis...

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Replying to rememberscarborough:
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By johnjenkins
18th Apr 2024 09:29

I have to say CIS was needed in the early seventies when the construction industry was "open to high abuse". People signing Mickey Mouse and Donald Duck for their cash. Now with H & S etc. it is no longer needed. Will HMRC get rid of a cash cow?

Thanks (1)
Replying to johnjenkins:
VAT
By Jason Croke
18th Apr 2024 12:30

johnjenkins wrote:

I have to say CIS was needed in the early seventies when the construction industry was "open to high abuse". People signing Mickey Mouse and Donald Duck for their cash. Now with H & S etc. it is no longer needed. Will HMRC get rid of a cash cow?


I think CIS is still very much needed, although it remains a cumbersome piece of legislation.

The threat of not getting your invoice paid in full and instead some of your invoice being subject to what is akin to a withholding tax, is a fairly efficient means of ensuring compliance, although like any tax or scheme, there are always ways to circumvent or to just outright ignore.

The fact that reverse charge for VAT was also introduced just further proves that the sector as a whole is typically untrustworthy in HMRC's eyes.

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Replying to Jason Croke:
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By johnjenkins
18th Apr 2024 14:20

Everything is untrustworthy in HMRC's eyes and so we have the start of the economic decline. It's already started. I call it stagnation, some refer to it as mild recession. whoever leads the country next will have their work cut out. These days we don't need CIS, RTI, IR35, AML, Auto enrollment et al.

Thanks (3)
Replying to rememberscarborough:
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By Touchcomp
22nd Apr 2024 11:36

I am with you on this - just cancel CIS altogether. Builders could do without this admin, it just encourages them to go black market. It would make more sense to add the admin to RTI PAYE. Many contractors have employees, so filing additional contractor payslips would be far simpler.

Thanks (1)
VAT
By Jason Croke
18th Apr 2024 12:24

I agree that having to re-verify every contractor is perhaps overkill.

But there is the (low) risk that a contractor used previously may have left the CIS or been removed from it (as a result of these new rules) and that then changes how the contractor is paid and remember CIS status also affects the VAT treatment.

It is a similar (low) risk every time any business reclaims input tax....potentially a supplier could have deregistered for VAT but carried on charging VAT in error, it does happen, I've seen it happen, the risk is with the purchaser reclaiming VAT on an invalid invoice....but realistically nobody is checking VAT number validity on every supplier invoice every day and HMC are unlikely to spot during an inspection either unless for a big value.

As Advisors and Accountants, my view is we need to point out risks and then up to the client how they want to manage that risk.

Thanks (0)
VAT
By Jason Croke
18th Apr 2024 12:25

I don;t know if HMC has written to CIS traders or not.

I'd like to think that this should happen, I agree that your typical contractor is not going to be subscribed to Agent Updates or the ICAEW website.

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By Chris Floyd
22nd Apr 2024 11:14

There's no need to re-verify subcontractors unless the contractor has not paid them within the last 2 tax years. The guidance (CIS340) states, at para 3.10:
"Sometimes a subcontractor’s payment status will change from payment under deduction to gross payment. If this happens, we’ll tell the subcontractor and any contractors who have verified or used the subcontractor in the current or previous 2 tax years. The revised payment status should then be applied to all subsequent payments to the subcontractor as soon as it’s practical for the contractor to do so."

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By ryanmillward
22nd Apr 2024 11:33

Wouldn't it be great if HMRC notified you when the CIS status of one of your verified subbies changed!

Thanks (2)