Construction industry scheme reform: RSM’s thoughts on the proposed changes

26 July 2023

Reducing fraud, while simplifying the rules is important, but this shouldn’t create barriers for legitimate businesses

Since its inception in 1971, the Construction Industry Scheme (CIS) has been reformed several times, the last most notable changes being in 2007. Change is afoot again, with HMRC setting out new  proposals to update the rules in their consultation document Construction Industry Scheme reform

This consultation explores proposals to minimise the risk of fraud in the sector, while also simplifying the rules for legitimate businesses and organisations. It centres on:

  • strengthening the Gross Payment Status (GPS) tests by including VAT compliance;
  • simplifying the treatment of payments made by landlords to tenants for construction work; and
  • introducing a new grouping arrangement for certain groups of companies operating  the CIS.

HMRC are also seeking views on further simplification of the CIS.

Overall, we welcome HMRC’s proposals. However, further consideration needs to be given to the practical aspects of applying the proposals to ensure they achieve the desired objectives and do not increase administration or create unintended anomalies. 

Tolerances and transparency are a must when strengthening the GPS test

Currently, when a subcontractor applies for GPS, their tax compliance is checked by HMRC and they will only be granted GPS if they have been tax compliant. If GPS is given, compliance is then checked by HMRC annually, and if the subcontractor has not been compliant in that year, their GPS can be removed. 

Currently, the compliance tests only consider direct tax compliance, not VAT. HMRC are concerned about criminal gangs using GPS to facilitate supply chain fraud, and their proposal is to include VAT compliance in the GPS compliance tests to help tackle this. 

RSM is broadly supportive of this proposal if it helps to address the criminal activity that HMRC is concerned about. However, small and innocent VAT errors are commonplace, and it is crucial that suitable compliance tolerances are included if this change is to be made, to avoid minor and innocent errors unfairly creating a barrier to obtaining or retaining GPS. Having gross payment status is valuable for legitimate subcontractors and being denied it, or losing it, can be hugely detrimental for the subcontractor’s business. 

Genuine commercial transactions between landlords and tenants should be CIS exempt 

The issue of landlords making payments to tenants for construction work is an overly complex area of CIS to deal with. Currently the rules focus on whether the works are ‘CAT A’ or ‘CAT B’ works. Landlord payments to tenants for landlord works (CAT A) and landlord contributions to tenants for tenants’ works (CAT B). Broadly, payments for CAT A works are within the scope of CIS, but inducement payments for CAT B works are exempt. 

Given the complexities and anomalies in applying the CIS to payments from landlords to tenants, RSM believes that all such payments, regardless of whether they are for CAT A or CAT B works, which are genuine commercial transactions not made to gain a tax advantage, should be exempted from CIS. 

New grouping arrangement shouldn’t exclude companies in a group without GPS

Large corporate groups can spend considerable time each month identifying which companies must file a CIS return because they have paid subcontractors. In some cases, the infrequent nature of the payments makes this compliance obligation time consuming and burdensome. To address this, HMRC have proposed a grouping arrangement where a nominated company in the group could apply to create a grouping arrangement and would then make a single monthly CIS return to HMRC reporting all payments made by the group members. 

RSM is supportive of the CIS grouping arrangement proposed by HMRC, however we believe that this should not be limited to groups that operate in the property sector, as the onerous CIS reporting obligations the HMRC proposal seeks to address are also experienced by groups operating in other sectors. We also believe that the grouping arrangement should not exclude companies in a group who do not have gross payment status.

On further simplification of the CIS

RSM fully supports further simplification of the CIS. Our full response to the consultation document highlights a number of other improvements relating to the scope of CIS and HMRC guidance, contractor registrations, and the deemed contractor rules.

The consultation closed on 20 July. HMRC will now consider responses and publish their response in due course. 

If you would like to discuss the impact of CIS reforms on your business, or to read RSM’s full response to this consultation please contact Lee Knight.

To view our latest real estate and construction insights find out more on the real estate and construction industry page.

Lee  Knight
Employer Solutions Director
Kerrie Willis
Tax Director, Employer Solutions
Lee  Knight
Employer Solutions Director
Kerrie Willis
Tax Director, Employer Solutions