Consultation: Construction Industry Scheme reform

Question 1

Summary

Accepted Answer

Subject of this consultation

This consultation seeks views on possible changes to strengthen and simplify the Construction Industry Scheme (CIS).

Scope of this consultation

This consultation considers whether it would be appropriate to add VAT to the list of taxes HMRC must consider when undertaking the statutory compliance test for receiving or keeping Gross Payment Status (GPS). It seeks views on how adding VAT could be given effect and the consequences for those affected.

In addition, the consultation sets out 2 areas where stakeholders have told HMRC that the operation of the CIS is causing unnecessary administrative burdens: landlord/tenant payments; and multiple reporting requirements by some groups. It seeks views on the scope and impact of those burdens, and the government’s proposals for removing or reducing them.

The consultation also invites views on whether there are other areas of the CIS causing unnecessary administrative burdens.

Who should read this

Contractors and Deemed Contractors (including in the property sector), those operating within the construction sector generally, and agents and professional bodies who represent the sector or clients within the sector. If implemented, the changes would apply to businesses which apply for, or hold, GPS. They would also affect commercial landlords and certain groups comprising large numbers of companies each with a CIS reporting obligation.

Duration

12-week consultation starting on 27 April 2023 and ending on 20 July 2023.

Lead official

The lead official is I Byrne of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Please send responses to cisconsultations@hmrc.gov.uk.

Alternatively, you can write to:

The CIS Policy Team
HM Revenue and Customs
14 Westfield Avenue
Stratford
E20 1HZ

Additional ways to be involved

We will be engaging with members of HMRC’s Construction Forum ^{[footnote 1]} (hereafter ‘the Forum’) on the proposals described in this consultation document. In order to reach people who would be affected by the issues under discussion in this consultation document, we will be holding roundtable events during the consultation period. If you would like to attend any of these events, please contact cisconsultations@hmrc.gov.uk.

After the consultation

A summary of responses to the consultation will be published later in the year. The responses will assist in developing any proposals to be taken forward, and in drafting the legislation, guidance and communications required to deliver the changes.

Getting to this stage

In 2017, the government published a consultation entitled, Fraud on provision of labour in the construction sector. In this consultation, HMRC suggested changes to the qualifying criteria for GPS within the CIS.

The government published a further consultation in March 2020 entitled Tackling Construction Industry Scheme Abuse. In this consultation the government welcomed suggestions on strengthening the rules for securing GPS.

Since publication of these consultations, HMRC compliance staff have monitored labour fraud in construction and have identified evidence of consistent GPS fraud where Organised Criminal Groups (OCGs) use false invoices to pass payments down contrived supply chains from contractors, down through multiple subcontractors. This causes losses to the Exchequer of the CIS deductions and VAT.

The potential changes explored in this document are designed to tackle abuse of CIS GPS rules, ensuring that HMRC can act quickly where the rules are being broken and level the playing field for the majority of compliant businesses operating within construction.

Members of the Forum have also raised concerns with HMRC on the impact of the CIS on certain groups, and on the payments made by landlords to tenants. They have identified these as areas where reform could reduce administrative and cash flow burdens that were never intended when the regime was created.

Previous engagement

Respondents to the March 2020 consultation suggested tightening the process and criteria for securing GPS and removing that status where a business deliberately undermines the operation of the CIS. The government committed to setting up the Forum to discuss these issues further with the sector.

Since previously published consultations, HMRC has engaged with the Forum on raising awareness of Labour Fraud in Construction. HMRC held roundtable events with Forum members on potential changes to landlord to tenant payments and reducing the impact on certain groups of operating the CIS. Members have been valuable in highlighting the issues and providing evidence. In addition to this, HMRC regularly carry out educational work highlighting due diligence requirements and supply chain risks, and how to guard against them.

Question 2

1.  Introduction

Accepted Answer

Background

The CIS was introduced in 1971 as a revenue protection scheme designed to address the risk presented by a sector with large numbers of mobile workers paid in cash. It protects around £7.7 billion of tax per annum.

While the nature of risk has changed in some regards since 1971, the sector still presents a significant risk, based partly on the continuing existence of large numbers of mobile workers who are frequently paid in cash. Further issues arise from the existence of sometimes long supply chains which are vulnerable to manipulation and exploitation by those perpetrating fraud.

Even though the CIS has been reformed several times since its inception, most notably in 2007 when the largely paper based scheme was digitised, the government is aware that the changing nature of construction means that the CIS needs to keep evolving. Change driven both by legitimate commercial considerations and attempts to defraud the Exchequer, means that the government needs to ensure that the CIS continues to fulfil its core revenue protection function while removing or reducing administrative burdens where there is no or minimal Exchequer risk.

Areas for potential reform

The current CIS legislation does not allow VAT to be taken into account as part of the compliance test, which brings a risk that traders who are not fulfilling their VAT obligations nonetheless are being given GPS. Potentially adding VAT to strengthen the GPS compliance test is discussed in Chapter 3 of this document.

While the CIS operates well in the majority of sub-sectors and scenarios, the government is aware of areas where the scope of the CIS, and also the monthly reporting requirements, are causing unnecessary administrative burdens with either no or minimal Exchequer benefit. Chapter 4 explores the full extent and impact of 2 specific administrative burdens identified and the potential remedial action, and then asks about any further ways of simplifying the CIS.

Question 3

2.  The Construction Industry Scheme

Accepted Answer

How it works

The core feature of the CIS is that deductions are made by contractors on payments made to a subcontractor, at one of 3 rates:

30% if the subcontractor is not registered with HMRC
20% if the subcontractor is registered with HMRC
no deduction if the subcontractor holds GPS

Contractors must establish the CIS status of the subcontractors they engage and pay the withholding tax to HMRC. All contractors working in construction must register under the scheme. Subcontractors can register with the scheme to receive a lower rate of withholding tax, or apply for GPS.

GPS

GPS allows subcontractors to receive payments from contractors gross, with no tax deducted under the scheme. To gain GPS subcontractors must pass 3 qualifying tests:

the compliance test – all CIS and direct tax affairs must be up to date, with all returns and payments (excluding Income Tax Self-Assessment and Corporation Tax Self-Assessment payments) correct and submitted by the statutory deadlines
the business test – an applicant must prove that they operate a business, that it carries out construction operations (or supplies labour for construction operations) and operates through a UK bank account
the turnover test – the net 12-month turnover must be greater than £30,000 per director/partner (or over £100,000 for the whole company/partnership)

The compliance test predates the creation of HMRC, and it has not been updated to incorporate both direct and indirect taxes which were previously dealt with separately under the Inland Revenue and HM Customs and Excise.

Once GPS is granted to a business, HMRC annually runs an automated check of the GPS holder’s compliance with their direct taxes’ obligations. GPS can be cancelled if, at any time, HMRC finds that the business fails any one of the 3 tests.

Where compliance failures are identified, HMRC will write to the subcontractor giving a 90-day notice period before GPS withdrawal. Where incorrect information is provided, where fraud is identified, or where the applicant knowingly failed to comply, GPS can be cancelled immediately. A 30-day appeal period applies in relation to immediate removal, with GPS cancelled until such time as an appeal is successful.

Deemed contractors

Businesses not in construction but which have annual spends of over £3 million on construction operations must also register as contractors. These are termed ‘deemed contractors’ and typically include organisations such as Local Authorities, Banks, Building Societies and supermarket chains.

Payments which landlords make (where they are deemed contractors) to tenants for work which would normally be the responsibility of the landlord (such as major structural works) are within the scope of the scheme whilst payments for more cosmetic work (such as amending internal lay out) as an inducement to the tenant to enter into the lease, are excluded. This demarcation between the 2 types of payment is proving difficult given how the commercial property sector operates.

Certain deemed contractor groups comprise large numbers of companies each obliged to register as contractors, but which often only make infrequent construction payments which trigger an obligation to submit a monthly return. Although contractors are able to notify HMRC of a period of inactivity of up to 6 months which inhibits late filing penalties, this process does not fit the needs of companies with spasmodic reporting requirements. Although there is no legal obligation to submit nil returns, many such companies do as a safeguard against erroneously being issued with late filing penalties and the burden of having to get them set aside. This is particularly an issue for property groups where they may have over 100 companies registered as contractors.

In April 2021, government made changes to the CIS, largely to change the qualifying criteria for deemed contractors and introduced the ability to amend CIS deduction amounts claimed on the subcontractor employer’s Employer Payment Summary return. In March 2021, the government also introduced the VAT Domestic Reverse Charge (DRC) designed to counter VAT supply chain fraud in construction. Through this consultation, the government is now seeking views on further potential reform of the CIS.

Question 4

3.  Potential reform – strengthening the GPS tests

Accepted Answer

Strengthening the GPS tests

The government recognises that the majority of GPS holders are legitimate and compliant construction businesses. However, in recent years it has become more open to abuse by OCGs. Responses to previous consultations in 2017 and 2020 both suggested that HMRC tighten the process and criteria for securing GPS to limit abuse of the scheme. Industry representatives have recently commented on the fact that VAT is not included in the compliance test and the government is therefore seeking wider views on such a change.

The issue

Legislation currently permits only direct tax compliance to be taken into account when considering applications for, or removal of, GPS.

HMRC are aware that GPS is being used to facilitate supply chain fraud by criminals. OCGs do this by using false invoices to pass payments down contrived supply chains from contractors, down through multiple subcontractors.This causes losses to the Exchequer of the CIS deductions and VAT. Furthermore, because OCGs often control multiple companies in a supply chain, they will then use this unpaid tax to pay off-payroll workers in companies lower down the supply chain, so further defrauding the Exchequer.

There are existing measures in place to target VAT abuse. The VAT DRC is targeted at certain construction supplies. The changes were designed to counter VAT supply chain fraud in construction and are having a positive effect with those at the higher end of the supply chain paying more VAT. However, the DRC does not cover all supplies of goods and services within the construction sector, nor does it remove subcontractors’ ability to secure GPS status despite being non-compliant with their VAT obligations.

In practical terms, this means that the GPS test can fail to exclude businesses that have committed VAT abuse. Evidence indicates that those committing VAT abuse are highly likely not to pay the total tax due on construction work performed. Non-compliance with VAT obligations could therefore indicate wider non-compliance.

See Annex B for a case study example of a fraudulent entity, which is able to keep GPS.

Potential solutions

The government is seeking views on the following potential reforms to strengthen the GPS tests:

adding VAT to the compliance test
bringing forward the first annual review of compliance history
introducing a power to enable HMRC to mandate the channel of application for GPS

Adding VAT to the compliance test

Under this proposal, VAT would be included as one of the taxes considered in the compliance test, to be reviewed both on application for GPS, and in the annual compliance check.

This would affect all new GPS applicants and existing GPS holders. However, this is an automated check carried out by HMRC and would place no extra administrative burden on GPS applicants or holders.

Based on an analysis of the current GPS population compared to our records of VAT compliance, we estimate that approximately 16% of the active GPS population would currently be non-compliant on VAT grounds if the test today was changed today.

However, for almost all of these (approximately 15% of the total population), failure would be for issues that HMRC believe could be resolved by applicants simply complying with their obligations in a more timely manner.

The government is seeking views on whether more timely compliance with obligations could be achieved by giving prior notice of any change. The government is also seeking views on existing appeal rights against withdrawal of or refusal to grant GPS extending to refusals/withdrawals applying where VAT failures have been identified.

Bringing forward the first annual review of compliance history

Once a business holds GPS, this can be cancelled if at any point the business would not pass the 3 tests. HMRC runs an automated annual check of a business’s compliance with its statutory obligations. This will indicate any missing/late returns or payments.

Potentially the first automated check could take place 6 months after GPS is granted rather than twelve, and annually thereafter. This would mean HMRC checking compliance sooner after the GPS initially being granted, giving the opportunity for removal if businesses quickly become non-compliant. Views are invited on the pros and cons of bringing forward the first automated check.

Introducing a power to enable HMRC to mandate the channel of application for GPS

HMRC is aware that many fraudulent entities apply for GPS via telephone, perceiving this to be a less challenging route. The telephone channel, whilst robust, does not lend itself to the detailed checking required where evidence in support of applications needs to be scrutinised.

Legislation enabling HMRC to prescribe the channels through which GPS applications must be made would enable the eventual move exclusively to digital applications. That would be after further industry discussion and sufficient notice of change.

HMRC believes that GPS applicant businesses should not have any problems submitting an application digitally. The government welcomes views on the proposal, including whether eventually requiring GPS applications exclusively digitally would have unintended consequences and impacts, such as for any digitally-excluded taxpayers.

Digital application would mean that the application process is streamlined and simplified. Applicants would be able to submit evidence online, also allowing HMRC to have a digital footprint of the applicant.

Question 1: What are the views on including VAT in the GPS compliance test?

Question 2: Can you see any unintended consequences if VAT was added to the compliance test: are there barriers to submitting returns/payments in a timely manner, and could the proposal affect compliant or particular sized businesses?

Question 3: What channels of application are preferred, and do you envisage any challenges in shifting to digital?

Question 4: Are there any other changes that could be made to the scheme which would prevent abuse, while also maintaining simplicity for legitimate users?

Question 5

4.  Other potential reform changes – administrative easements

Accepted Answer

Simplifying the treatment of payments made by landlords to tenants

Background

Landlords often make payments to prospective tenants, sometimes to encourage tenants to enter into a lease. HMRC identify 2 categories of payments and treat them differently for CIS purposes:

category A (CAT A) – works that are the responsibility of the landlord or would otherwise have been carried out by the landlord. Such payments are within the CIS
category B (CAT B) – expenditure funded by the landlord for the benefit of the tenant’s business. Such payments qualify as ‘reverse premiums’ and so fall outside the CIS, by virtue of Section 96 Corporation Tax Act 2009

Current Process

The decision as to whether CIS should be applied to a payment made by a landlord to a tenant has to be made by the landlord. The definition of what is and is not a reverse premium has led to difficulty in landlord-tenant transactions where businesses would otherwise be completely outside CIS.

HMRC’s published guidance at BIM 41050 defines a reverse premium as: ‘A reverse premium is a payment or other benefit received as an inducement to take on a lease or other interest in land’.

CISR 14045 then states: ‘a payment for construction work which constitutes a reverse premium for CIS purposes, does not fall within the provisions of CIS, so the payment does not need to be subject to any CIS deduction or reported to HMRC via the CIS reporting provisions when made’.

The CAT A and B distinction is causing problems in several respects:

being within CIS is administratively burdensome for both the landlord and the tenant, and receiving payment under deduction of tax adversely impacts the cash flow of the tenant
reclaiming CIS tax suffered may be difficult for non-UK resident tenants
landlords, if uncertain, are acting conservatively and choosing to operate CIS rather than take the risk of making a mistake and having to account to HMRC later for the tax that should have been deducted
this can lead to uncertain tax and cashflow positions for tenants which could affect their confidence in entering new contracts

Question 5: Should any landlord to tenant payment be within the scope of CIS?

Question 6: Do all landlord to tenant payments include an inducement or encouragement element?

Question 7: How do you identify whether a transaction includes an inducement or encouragement element?

Question 8: What are the drivers for delegating building fabric works to tenants rather than landlords arranging it themselves?

Potential solutions

Both categories of expenditure could be treated as being outside the scope of CIS such that the payments can be made without deduction. This could be achieved legislatively in a variety of ways:

revisit distinction between CAT A and CAT B works – focussing on the underlying nature/intent of the payment
extend scope of Regulation 22 (The Income Tax (Construction Industry Scheme) Regulations 2005) to include CAT A work as own work for landlords
apply Regulation 22 to situations where tenants are carrying out CAT A and CAT B works so as to deem the tenant as having GPS in respect of any payments made by the landlord that would then benefit from Regulation 22
widen scope of Regulation 20 to treat all landlord tenant contributions as reverse premiums
amend Section 61 Finance Act 2004 – Deductions on account of tax from contract payment – so as to treat landlord to tenants payments as not being ‘contract payments
grant automatic GPS to tenants
copy the VAT DRC treatment whereby all landlord to tenant payments would be excluded from CIS in the same way as they have been excluded from the VAT DRC, such as where both parties have an interest in property
better education – prospective tenants should be made aware of the CAT A issue before they enter into a lease

Question 9: Which of the solutions suggested is preferable?

Question 10: What are the advantages and disadvantages of these proposed solutions?

Question 11: Is there a risk of creating the potential for manipulation/avoidance of the scheme by the diversion of monies via tenants?

Reducing the administrative impact on certain groups of operating the CIS

The problem

Monthly CIS reporting obligations work well for individual contractors and deemed contractors, and groups comprising small numbers of contractors where generally payments are made to subcontractors every month, so triggering a reporting obligation. Where such contractors or deemed contractors know they will not be making payments to subcontractors in the forthcoming months, they are able to notify HMRC of a period of inactivity for up to 6 months. This ensures that they do not receive late filing penalties.

There are groups, often comprising around 100 companies, where the companies are either contractors or deemed contractors but the nature of their business is such that individually they make infrequent and irregular payments to subcontractors. This means that each month the group needs to identify which companies have paid subcontractors and therefore have a reporting obligation, and which have not. Due to the infrequent payments to subcontractors, none of these companies can use the provision to set a period of inactivity. Despite there being no legal obligation to do so, ‘nil returns’ are submitted for those companies which did not pay subcontractors in the month. This ensures that these companies are not issued with late filing penalties which would then require additional work to have them removed by HMRC.

The problem is particularly prevalent in the property sector where it is common for property groups to comprise large numbers of companies each owning and responsible for the maintenance of perhaps a single property. Such groups spend considerable time each month identifying which companies must file a return because they have paid subcontractors, and which, although not obliged to, will file a nil return.

There is already an easement for groups operating CIS, known as ‘Scheme Representative’. Scheme Representative allows a company to appoint another company in the same group to act on its behalf to make returns and payments. However, the nominated Scheme Representative must continue to make returns and payments to HMRC under the name of the company or companies for which it is acting, still submitting a single company return each month to HMRC. This provision, which is often used by different groups, is an administrative convenience which enables the interface between HMRC and a group to be via one company rather than multiple companies. It does not, however, address the core issue that each group company has a separate legal reporting obligation.

Limited evidence suggests that this issue is not unique to the property sector and is likely to affect any group arrangement comprising a number of contractors and/or deemed contractors with infrequent reporting obligations: charities, pension funds and trusts are 3 areas where it has been suggested that similar problems may be occurring.

Question 12: Are there groups, other than property groups, that are affected by the excessive volume of returns they are submitting to HMRC?

Potential solution

The government wishes to test whether establishing a ‘CIS grouping arrangement’ for certain types of groups/entities could allow a single nominated company within a group/entity to be responsible for submitting one single monthly group CIS return on behalf of all companies in the group/entity.

A nominated company in the group could apply to create a grouping arrangement by providing the names and details of the companies within the group intended to be within the arrangement. The nominated company would then make a single CIS return to HMRC and would be treated for CIS purposes as the contractor on which statutory reporting and payment obligations fall.

Grouping arrangements exist for Corporation Tax and VAT and the final design of a new CIS grouping arrangement would take into account approaches already found elsewhere. One approach could be:

a company is eligible to elect into a grouping arrangement for CIS where there is a 75% or more ownership by a group parent company
each individual company would still be obliged to be registered as a contractor/ deemed contractor
each individual company would still be obliged to operate the CIS in terms of payments made to subcontractors, including intra-group payments
only companies with GPS would be eligible for being within the grouping arrangement
the group companies would be jointly and severally liable for CIS deductions due to HMRC

Question 13: Is a ‘grouping arrangement’ the best solution to the problem outlined and are there any elements which have not been set out?

Question 14: What responsibility in a ‘grouping arrangement’ should rest exclusively with the individual companies within the group and what responsibility with the nominated company?

Question 15: Do you see any specific anomalies which may arise in the context of CT and VAT grouping arrangements?

Question 16: Should the reporting of intra-group transactions be excluded on the CIS group return?

Other issues

Contractors can submit a monthly return in 2 ways: by the HMRC CIS online service; and third-party commercial CIS software. A new group arrangement may impact commercial software. If there are any changes to the group/group companies which would not be visible to HMRC in real time, HMRC would need a statutory process whereby HMRC was notified of changes affecting the constitution of the grouping arrangement.

If the group no longer requires operating under a grouping arrangement, the nominated company would need to notify HMRC. The group would be disbanded including the use of the group reference by the nominated company on behalf of the group. This would need a statutory process.

Question 17: Will establishing a ‘grouping arrangement’ impact on third party software providers?

Question 18: Should the process of a ‘grouping arrangement’ be statutorily prescribed by HMRC, and if so, to what extent?

Question 19: Are there any other issues you think will need to be considered?

Further simplification of the CIS

The CIS is a revenue protection scheme and as such simplifications must have regard to the risk to the Exchequer. The government believes that this core purpose of the CIS should not however be a barrier to ensuring the scheme operates in the least burdensome way as possible.

The government is aware that the CIS can create apparent or actual anomalies in terms of scope, for example with similar operations in different circumstances being within and outside of the CIS. The government is also aware that the administration of the CIS can either in specific areas, or more generally, be burdensome, including in areas the lack of digital interaction. The government also has to balance business burdens with Exchequer protection and protecting legitimate operators from being undercut by illegitimate operators.

The government invites views on whether further simplifications could be made either in terms of scope or administrative burdens, and also where increased digitisation could be possible.

Question 20: Are there areas of the CIS in terms of its scope and or administration where simplifications or improvements could be made?

Question 6

5.  Assessment of impacts

Accepted Answer

Summary of impacts

The government is keen to understand the consequences of the proposals in this consultation, particularly for compliant taxpayers. The table below sets out the government’s current understanding of the impacts of these measures. The responses to this consultation will inform the final assessment.

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
Exchequer impact (£m)	Nil	Nil	Nil	Nil	Nil	Nil	Nil

Exchequer Impact Assessment

Any Exchequer impact for the proposals will be estimated following consultation and will be subject to scrutiny by the Office for Budget Responsibility.

Impacts	Comment
Economic impact	These proposals are not expected to have any significant macroeconomic impact.
Impact on individuals, households and families	If implemented, the GPS proposal would only impact individuals applying for or who already hold, GPS, and who have VAT compliance failures. Fully compliant individuals would not be impacted by the measure. The landlord to tenant proposal is likely to impact individuals who are landlords and make payments to tenants. These payments would be removed from the scope of the CIS: therefore, the proposal is expected overall to improve individuals’ experience of HMRC as it will be clearer and simpler what payments are within the scope of the CIS. For the third proposal on group companies, there would be no impact on individuals, as this measure only affects companies. The proposals are not expected to impact family formation, stability or breakdown. Any future impacts identified following consultation will be fully examined and detailed.
Equalities impacts	It is not anticipated that any of the proposed reforms would have an impact on those groups sharing protected characteristics. (Further equalities considerations will be given following consultation).
Impact on businesses and Civil Society Organisations	As above, the GPS proposal would only affect non-compliant businesses. The landlord to tenant proposal will have a positive effect on property businesses. One-off costs could include familiarisation with new guidance that all landlord to tenant payments would no longer come under the scope of the CIS. The grouping proposal would have a positive effect on certain group companies. One-off costs could include familiarisation with a new process of how to submit group returns. It is expected that this would reduce ongoing administrative costs for the business by reducing the number of returns needed. This proposal is expected overall to improve a business’s experience of dealing with HMRC as filing returns will be simpler. These proposals are not expected to impact civil society organisations. Any future impacts identified following consultation will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	There would be both IT and resource costs for HMRC in developing, applying and policing these proposals.
Other impacts	Other impacts have been considered and none have been identified.

Question 7

6.  Summary of consultation questions

Accepted Answer

Question 1: What are your views on including VAT in the GPS compliance test?