19 July 2023

Forsters responds to UK government’s consultation on reforms to the Construction Industry Scheme

Tax Partner, Heather Corben and Tax Associate, Oliver Claridge, responded this week to the UK government’s consultation on reforms to the Construction Industry Scheme (“CIS”), which was published on 27 April 2023 (the “Consultation”). The Consultation closes at 11:45pm on 20 July 2023.

What is the CIS?

The CIS was originally put in place in the early 1970s to protect taxation revenue in the construction industry, which then, as it does now, regularly employs a large number of mobile workers who are paid in cash.

Contractors have to determine the CIS status of their subcontractors and make deductions from payments to them accordingly:

  • 30% deduction if the subcontractor is not HMRC-registered
  • 20% deduction if the subcontractor is HMRC-registered
  • 0% deduction if the subcontractor holds Gross Payment Status (“GPS”)

The withholding tax is then paid by the contractor to HMRC.

There is no exemption for contractors from registering for the CIS and any business which does not fall squarely within the construction sector but which spends over £3 million on construction operations annually also has to register.

In order to qualify for GPS, a subcontractor must satisfy three tests, namely, the compliance test (all direct taxes must be up-to-date with returns and payments made correctly and on time), the business test (the operating business carries out construction work and has a UK bank account) and the turnover test (the net 12-month turnover must exceed £30,000 per director or partner or £100,000 for the entire company or partnership).

If at any time, the subcontractor fails to satisfy any of the tests, its GPS can be cancelled by HMRC.

What is the Consultation about?

Strengthening GPS tests

Currently, only direct tax compliance is considered for the purposes of the GPS compliance test. The Consultation is therefore seeking views as to whether VAT should also be included to prevent businesses which have committed VAT (and potentially wider compliance) abuse from achieving GPS.

Annual checks of a business’s continuing compliance are undertaken by HMRC once the subcontractor has been registered for GPS. The Consultation covers whether the first check by HMRC should be brought forward to six months post-registration in order to detect businesses which become non-compliant soon after GPS registration.

The Consultation is also asking for opinions as to whether HMRC should be able to determine the medium by which an application for GPS is made, with the intention that this will become digitalised in the future. At present, applications can be made by telephone and the government is of the view that this may be “a less challenging route” and as such, is preferred by fraudulent entities.

Simplifying the treatment of landlord to tenant payments

Payments made by landlords to tenants (perhaps to encourage a tenant to enter into a lease) are classified in two different ways for the purposes of the CIS:

  1. Category A payments, being payments for works that are the landlord’s responsibility (for example, structural work) – these fall within the CIS
  2. Category B payments, being payments for works that benefit the tenant’s business (for example, internal cosmetic work) – these fall outside of the CIS

It is the landlord’s responsibility to determine which category a payment falls into and, simply put, this is causing a number of issues.

The Consultation is asking for views on the extent of these issues and on the government’s proposals to remove both categories from the CIS.

Reducing the administrative impact of operating the CIS

The CIS requires monthly reporting obligations with the ability to notify HMRC if monthly payments to subcontractors will not be made for up to six months. However, large groups of companies may not make such regular subcontractor payments and as a result, use a lot of resources to determine which companies within the group have made such a payment (which requires a return to be made) and which have not. “Nil returns” are often completed for those companies which have not made a payment to ensure that late filing penalties are not incurred, although strictly speaking a “nil return” is not actually required.

The Consultation is seeking views on whether the implementation of a “CIS grouping arrangement” would be beneficial, in a similar vein to corporation tax and VAT. This would allow one company within the group to submit a single monthly return on behalf of all the companies within the group.

Forsters’ response to the Consultation

Forsters welcomes the inclusion of VAT in the GPS compliance test, if this allows entities which may not have been in existence for long enough to file a corporation tax return to apply for GPS. However, we have also raised the concern that minor VAT errors are commonplace and should not prevent usually compliant entities from achieving GPS status. We have suggested that a minimum non-compliance threshold be put in place to counteract this potential problem.

We are not of the view that any landlord to tenant payments should fall within the CIS. In these cases, it is usual for the tenant to then pay a subcontractor, and so the arrangement will fall within the CIS regime anyway as the exemption does not continue to apply further along any contractual chain. Even in those cases where a tenant itself carries out the work, HMRC will have security in the form of the actual property asset.

Finally, we consider that a “CIS grouping arrangement” would be beneficial, provided that landlords as contractors or deemed contractors are able to benefit from such an arrangement and that the definition of “group” is clearly delineated.

Disclaimer

This note reflects our opinion and views as of 19 July 2023 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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