Consultation outcome

Construction Industry Scheme reform - summary of responses

Updated 22 November 2023

Executive summary

The government recognises the key role the construction sector plays in the UK economy, ranging from infrastructure to housebuilding.

The government remains committed to ensuring that the Construction Industry Scheme (CIS) operates in a way which is easy to comply with and simple to administer. Any changes to the CIS must balance this simplicity with its core purpose of Exchequer protection.

This consultation set out a number of compliance and simplification proposals to the scheme, and invited suggestions on areas for further simplification and digitalisation.

Responses to the proposals have provided useful information, which has informed legislative changes the government will bring forward in the forthcoming Finance Bill, coming into force from 6 April 2024. The government confirmed at Autumn Statement 2023 that it will:

• add compliance with Value Added Tax (VAT) obligations to the Gross Payment Status (GPS) compliance test, with corresponding regulations setting out exceptions to VAT compliance obligations

• expand the grounds for immediate cancellation of GPS. VAT, Income Tax Self Assessment (ITSA), Corporation Tax Self Assessment (CTSA) and Pay As You Earn (PAYE) will be added to the taxes where HMRC is able to immediately cancel GPS if they have reasonable grounds to suspect that the GPS holder has fraudulently provided an incorrect return or information

• introduce regulations to remove the majority of payments from landlords to tenants from the scope of the CIS

In addition to the legislative changes to the GPS compliance test, the government will bring forward the first review of a GPS holder’s compliance history from 12 months after application to 6, reverting to 12 months thereafter.

In April 2024, the government will introduce digital applications for CIS registrations. From this time, telephone applications will no longer be available apart from for those who are digitally exempt. Postal applications will remain available. In due course, and with advance warning to the industry, the government will mandate digital as the only channel of CIS applications.

No effective and timely way to give effect to a grouping arrangement has been identified. Therefore, the government will not legislate to introduce a grouping arrangement. However, information provided to the consultation will be used to explore other options to ameliorate the impact of the CIS on certain groups.

The government is grateful to those who took time to contribute written responses to the consultation and to those who took part in roundtable meetings to discuss the consultation.

In particular, the government is grateful for the range of simplification suggestions put forward by respondents, which the government is continuing to consider.

Introduction

Background to the consultation

On Spring Tax Administration and Maintenance Day (TAMD) 2023, the government published the consultation: Construction Industry Scheme (CIS) reform, proposing compliance and simplification changes to the CIS, and inviting suggestions on ways the scheme could be simplified and digitalised further.

One of the proposed changes set out in this consultation is designed to tackle serious abuse of the CIS Gross Payment Status (GPS) rules, ensuring that HMRC can act quickly where the rules are being broken and help level the playing field for the majority of compliant businesses operating within construction.

The principal compliance proposal consulted on was to add compliance with VAT obligations to the GPS compliance test. Questions sought to understand any unintended impacts of such changes.

The power to immediately remove GPS is a key power in tackling fraud. Whilst not proposed in the original consultation document, reflecting respondents’ feedback, the government will also expand the grounds for immediate cancellation of GPS. It will add VAT, CTSA, ITSA and PAYE to those taxes where HMRC is able to withdraw GPS if they have reasonable grounds to suspect that the GPS holder has fraudulently provided an incorrect return or incorrect information. This change reflects respondents’ views as it is specifically targeted at the fraudulent and will not impact legitimate businesses.

Following concerns raised by HMRC’s Construction Forum about the impact of the CIS in two specific areas, the consultation invited views on proposals to remove the majority of payments made by landlords to tenants from the scope of the scheme; and to introduce a grouping arrangement for certain groups with spasmodic CIS reporting obligations.

Forum members have explained that group companies, particularly in the property sector, often have a large number of companies who, due to the nature of their construction work, may not know from month to month whether they have a reporting obligation. They often have to file nil returns so as not to receive a late filing penalty. This is administratively burdensome, and the Forum asked HMRC to introduce a grouping arrangement, whereby a nominated company can submit a single return on behalf of the group.

Forum members have also expressed concern around the uncertainty of CIS treatment of payments from landlord to tenants, both in terms of clarity as to which payments are exempt from the CIS, and whether more payments should be exempt from the CIS. Landlords tend to err on the side of caution and apply the CIS where there is any doubt. This means that the tenant has to register as a subcontractor and will receive payment under deduction, which affects their cashflow. As such, tenants who are usually outside the scope of the CIS are being brought within it, possibly unnecessarily so.

Questions focussed on understanding the administrative burdens on affected groups, inviting views on suggested solutions.

Finally, the consultation invited views on ways the CIS could be further simplified and digitalised.

Summary of responses

The consultation was open for 12 weeks, closing on 20 July 2023.

Throughout this period, the government held 4 roundtable meetings and received 45 written responses to the consultation.

Responses were received from:

• 1 individual
• 14 companies and businesses
• 9 professional or representative bodies
• 20 legal and accountancy firms
• 1 other

The government is grateful to all those with whom the consultation was discussed, and those who submitted written responses, recognising the time and effort that went into them.

The government has carefully considered views and concerns raised by those consulted which have informed Finance Bill legislation and the corresponding regulation changes set out above.

Analysis continues on a number of proposed simplifications and digitalisations to the scheme. In particular, digital applications for CIS registrations will be introduced from April 2024.

Whilst not explicitly set out in consultation, some respondents expressed concern over the employment status of subcontractors in the CIS.

HMRC is aware of status misclassification issues in the construction industry. Whether an individual is employed or self-employed is not a matter of choice but is determined by the actual terms and conditions under which they work. Guidance and support to help understand employment status, includes the Check Employment Status for Tax (CEST) digital service. HMRC is committed to tackling false self-employment and will investigate evidence suggesting businesses have misclassified individuals for tax purposes.

Responses

The following three sections summarise the responses received. Specific questions focused on the following:

• compliance: to strengthen the tests for keeping and receiving GPS, principally by adding compliance with VAT obligations to the compliance test

• administrative easements (1) removing the majority of payments from landlord to tenants from the scope of the scheme; and (2) introducing a grouping arrangement for some construction groups with spasmodic reporting obligations

• areas for further simplification and digitalisation of the scheme

Strengthening the GPS tests

The consultation proposed several ways to strengthen the GPS tests, to prevent abuse and disrupt supply chain fraud by adding compliance with VAT obligations to the GPS compliance test, to be checked alongside direct taxes both on application for GPS and then during automated reviews of compliance. Bringing forward the first automated review of compliance history from 12 months after application to 6 months and introducing a power to enable HMRC to mandate digital GPS applications.

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

The majority were in favour of the change whilst one respondent was not. Respondents agreed in principle that subcontractors should demonstrate compliance with VAT as well as direct taxes in order to receive and keep GPS. One respondent felt that adding VAT to the GPS compliance test was insufficiently targeted. Most agreed that in cases of serious VAT non-compliance, HMRC should have the power to remove GPS.

The majority of respondents wanted HMRC to ensure that minor VAT failures and errors would not result in GPS refusal or removal. Respondents highlighted issues relating to the nature and administration of VAT including payments on account; effects of the Domestic Reverse Charge (DRC); the digitalisation of VAT returns (causing delays); and VAT group returns. Respondents wanted HMRC to consider these factors to ensure that compliant businesses who make genuine VAT errors would remain unaffected in terms of their GPS status.

Respondents also wanted clear guidance and communication with the industry of VAT compliance requirements ahead of implementation.

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?

Unintended consequences included delays in receiving GPS and potential cash flow implications if GPS was removed from legitimate businesses. Barriers mainly included those from the nature of VAT administration, including VAT grouping and the digitalisation of VAT reporting. These issues may cause errors and delays that prevent timely returns/payments for legitimate reasons. Respondents emphasised that small businesses that are not VAT registered should not be prevented from getting GPS. It was emphasised that large businesses may make a number of errors due to the volume of VAT returns.

Government response

The government is grateful for the detailed points made by respondents relating to the addition of VAT to the compliance test. The government will bring forward legislation in the forthcoming Finance Bill taking effect from April 2024. VAT compliance will be introduced as a requirement of receiving GPS and will be part of a regular compliance review. The focus will be on those who are seriously non-compliant who should not have GPS. As with the current compliance test, the government will lay regulations which set out compliance failures that can be overlooked, including the number of days returns and payments are made late and on how many occasions. In addition, where there is reasonable excuse for errors, GPS will not be removed. Small businesses which are not VAT registered will not be denied GPS on those grounds.

In consulting on VAT compliance in relation to GPS refusals and removals, the majority of respondents said that they wanted any addition to be sufficiently targeted at the seriously non-compliant. The immediate removal of GPS is a key power in tackling fraud.

The power to immediately remove GPS due to fraud is currently narrowly linked to CIS fraud. As set out in the consultation, supply chain fraud usually cuts across multiple taxes. The government believes that adding other taxes: VAT, CTSA, ITSA and PAYE, will mean that HMRC can act quickly to remove GPS in cases of fraud. Although this was not included in the original consultation document, this reflects respondents’ views as it specifically targets the fraudulent and will not impact legitimate businesses. Existing appeal rights will apply.

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

The majority of respondents welcomed a shift to digital applications as a more efficient and user-friendly route. Some respondents supported a full shift to digital applications while others wanted to see another channel of application remain in place. Suggestions were made as to how to make the new process more customer friendly, including the ability to save and come back to applications. In addition, respondents wanted to see guidance and support provided alongside the shift to digital. It was recognised that this would be more robust channel to prevent criminals getting access to GPS. Finally, respondents asked whether digitalisation would be provided for entities which experienced most problems with applications, including non-residents.

Government response

In response to the needs of customers, HMRC is in the process of developing a digital CIS subcontractor application service, due to go live in April 2024. This will incorporate several of the suggestions made by respondents, including listing from the outset the documents needed and including the ability to save and come back to applications. From April 2024 the ability to make CIS applications by telephone will be withdrawn other than for those unable to make applications digitally or by paper. Guidance of how to complete the new electronic forms will be provided. In addition, the CIS helpline will remain open for CIS queries.

In due course, CIS applications will only be able to be made digitally (other than for the digitally excluded). HMRC will provide sufficient advance warning of the move to exclusive digital applications and ensure that those unable to use the digital service remain able to make application via other channels.

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?

A number of suggestions were made to this question. Some related to the criteria for GPS, others focussed on increased risk and compliance checks by HMRC, while others suggested changes to the processing of applications, including digitalising or moving to a ‘process now, check later’ approach. Other suggestions included:

• improving communication channels
• applying a de minimis for contract payments caught by the CIS
• introducing a tiered system of reporting obligations, depending on the size of the company

Government response

The government has carefully considered suggestions to prevent the scheme from abuse whilst maintaining simplicity.

The government recognises that CIS GPS applicants can often experience delay for a number of reasons. The introduction of a digital GPS application process should make the process more efficient and the checks more robust to protect against fraudulent entities gaining access to GPS. HMRC remains committed to processing GPS applications within 15 days. As GPS can be open to abuse, and seriously non-compliant entities with GPS can inflict serious harm, the government believes that moving to a process now check later approach for GPS approvals would present too great an Exchequer risk.

The government will continue to review further suggested changes to the CIS to identify those which could be implemented without adverse consequences.

Administrative easements

Simplifying the treatment of payments made by landlords to tenants

At present some payments made by commercial landlords to tenants are within the scope of the CIS: those in respect of building works that are the responsibility of the landlord. Others are exempt, principally those directly for the tenant’s benefit paid as an inducement to enter a lease (reverse premiums).

The view of Construction Forum members is that the demarcation between which landlord to tenant payments are subject to the CIS and which are not, is not always clear. Reverse premiums are excluded from the CIS but the definition of what is and is not a reverse premium has led to difficulty in landlord-tenant transactions, where businesses that would otherwise be completely outside, are brought within the scope of the scheme.

Notwithstanding the lack of clarity regarding which landlord to tenant payments in respect of building works commissioned by the tenant should be exempt from the CIS, the majority of respondents to the consultation also consider that all landlord to tenant payments should be exempt. Respondents believe the continued application of the CIS places administrative and financial burdens on both landlords and tenants. 

The consultation sought information on the commercial drivers behind landlord to tenant payments and how they interact with the CIS. In addition, it invited suggestions as to potential solutions.

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

The overwhelming majority of respondents were of the view that landlord to tenant payments should not be in the scope of the CIS. They stressed the complexity of the scheme and its potentially negative impact. Respondents argued that the CIS was not set up to involve these payments but operates in practice so as to bring payments from landlords to tenants within its scope where they have no prior experience and no links with the construction sector.

Respondents also suggested new investors or tenants may be put off from taking on leases if they are obliged to become involved in a tax regime designed for the construction sector. Tenants have to register for CIS, but then cannot quickly obtain the GPS status, so have to suffer withholding tax which impacts on their cash-flow.

The majority of respondents argued that the risk to the Exchequer of removing these payments from CIS is minimal as the payments are commercially driven, and paid electronically. As such there would appear to be little risk of fraud.

Government response

The government acknowledges respondents’ views that all landlord to tenants should be removed from the scope of the CIS. However, the complete removal of all landlord to tenant payments from the CIS would create an unacceptable risk allowing unscrupulous landlords to exploit the exemption to avoid the legitimate application of the CIS. Nevertheless, there is clearly scope to widen and simplify the definition of which landlord to tenant payments should be exempt from the scheme.

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

Responses to this question were mixed. Whilst some were firmly of the opinion that not all such payments include an inducement element, an equal number thought that it was not necessarily easy to identify an inducement. They suggest that such payments are often reflective of circumstances outside the agreement including market/economic conditions or the financial situation of the tenant. They also pointed out that many landlord to tenant payments occur during the lease, so cannot be inducements or encouragements.

Government response

The government acknowledges the current complexities in identifying whether particular payments include an inducement element and that this lack of clarity can cause difficulties in deciding the CIS treatment of certain payments.

The government will lay regulations, to take effect from April 2024, which will remove the majority of landlord to tenant payments from the scheme.

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

Most respondents suggested that it would be apparent from the lease agreement, heads of terms or any other legal documentation signed before the tenancy begins. A comparison to market rates and conditions for unconnected parties at the time of signing was also considered relevant.

Several respondents stressed the sheer complexity of the transactions in question made it difficult to identify any particular inducement encouragement elements. Lawyers and advisors involved in contract discussions can struggle to be certain which leads to more complexity for landlords and tenants.

Government response

The government notes that, whilst in some cases it is clear from the relevant documentation that a transaction includes an inducement or encouragement element, in other cases the complexity of the arrangement can make this difficult to identify such an element.

Regulations to be laid in due course will remove the need for an exempt payment to be an inducement or encouragement. 

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

Respondents suggested a variety of factors, the most popular being simplification and the need to make sure that the finished building meets the requirements of the tenant. Often the works are undertaken by the tenant, so it reduces administrative burdens, time, waste, and costs if everything is delegated to the tenant and there is only one construction company on site.

Government response

The government acknowledges that there could be good reasons, particularly in terms of efficiency or simplification, for landlords to delegate building works to a tenant.

Regulations to be laid in due course will seek to address bona fide commercial practice while guarding against the risk of manipulation by unscrupulous landlords.

Question 9: Which of the (remedial) solutions suggested is preferable?

The consultation listed a number of options to address the problems set out above. Such options included various legislative changes to either exempt specific types of payments from the CIS or remove landlord to tenant payments entirely from the scope of the CIS. Other options included better education on the categories of payments and the corresponding CIS obligations.

Whilst there were numerous responses to this question, there was no clear majority for any one of the eight solutions set out in the consultation document. However, the majority of respondents expressed a preference for a legislative solution. It was felt that this would be necessary in order to address the legislative uncertainty and complexity and the administrative burdens of categorising payments and whether or not to operate the CIS.

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

A summary of the advantages and disadvantages of each proposed solution can be found at Appendix B.

The vast majority of respondents felt that some form of legislative change was desirable. Respondents felt the best solution would be one which completely removed the majority of payments from the scope of the scheme, doing away with the current categorisations and the focus on whether the payment is an inducement to enter a lease.

The most popular solutions were the proposed changes to Section 61 Finance Act 2004, Regulation 20, and Regulation 22 of The Income Tax (Construction Industry Scheme) Regulations 2005. A proposed mirroring of the VAT DRC treatment was also popular. Each of these 4 options had similar levels of support.

Respondents acknowledged that each of the proposed solutions had its drawbacks, usually including additional complexity. They also mentioned the possibility of any legislative change opening up avoidance opportunities but were of the opinion that HMRC already has the powers necessary to challenge such avoidance.

A disadvantage of legislative options that did not completely remove the payments from the scope of the scheme (such as to grant all tenants GPS) was that this would not address the issue of tenants still being incorrectly brought into the scope of the CIS, and the automatic granting of GPS would be more open to abuse.

The option of better education, although regarded as simpler and easier to deliver, received minimal support. Respondents felt it would not address the key problems of legislative uncertainty and that the current administrative burdens and the cashflow implications on tenants will remain unchanged.

Finally, respondents stressed that care would need to be taken to clearly set out which landlord to tenant payments would be outside of the scope of the CIS, to minimise the scope for potential abuse where unscrupulous landlords could use artificial leases to circumvent the CIS.

Government response

The government notes that, although there is a general consensus for a legislative change, none of the suggested solutions was particularly favoured by all respondents.

Having carefully considered respondents’ views, the government intends to lay regulations to come into force from April 2024. The intention is to amend Construction Industry Scheme (CIS) Regulations to simplify the criteria for payments from landlords to tenants being excepted from the CIS. This option is favoured because it builds on the current approach to exceptions as set out in regulations. 

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

In general, respondents felt that the potential for avoidance was low and disproportionate to the current administrative burdens caused by landlord to tenant payments being within the scope of the scheme. Respondents suggested a number of ways to mitigate the scope for avoidance, including;

• making any legislation clear, setting clear criteria for payments outside of the scope of the CIS
• HMRC would be able to use existing ways of dealing with avoidance, including General Anti-Avoidance provisions, Targeted Anti-Avoidance provisions, Corporate Criminal Offense legislation, Ramsey Principles, as well as existing compliance powers
• better education for tenants on the risks
• enhanced penalties to deter avoidance

Government response

The government notes the comments expressed by respondents. The government wishes to avoid the creation of explicit anti avoidance provisions within regulations and believes that changes to the CIS regulations can be made in such a way as to provide clarity in terms of the parameters of excepted payments. Clarity regarding excepted payments will of itself make the use of the exception for avoidance purposes extremely difficult.

Reducing the administrative impact on certain groups operating the CIS

The consultation suggested the introduction of a grouping arrangement for certain groups with spasmodic reporting obligations. Such an arrangement would allow a single nominated company within a group to be responsible for submitting one single monthly group CIS return on behalf of all companies in the group.

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

Respondents said that property and construction groups were most impacted by spasmodic reporting obligations and excessive returns. A number of respondents felt that the burden of submitting an excessive volume of returns is not sector specific and is likely to impact any groups that have a number of Special Purpose Vehicles (SPVs). Responses also suggested other groups that may be affected, including retail, leisure and hospitality sectors, large charities, and housing associations. However, we did not receive any specific responses from these sectors.

Government response

The government recognises that for any group to which the CIS applies, where group members have spasmodic reporting obligations, there is an increased administrative burden. The government further recognises that a grouping arrangement would partially ameliorate the administrative impact of the CIS on such groups.

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

The vast majority of respondents felt that the ‘grouping arrangement’ was the best solution and would reduce administrative burdens for group companies operating the CIS, and for HMRC by reducing the number of returns received.

A number of respondents did not support specific elements of the proposal set out in consultation, in particular, the requirement for all companies in the group to have GPS and for joint and several liability of all members of the group for CIS deductions. Additionally, some felt that a grouping arrangement may not significantly reduce the administrative burdens, as the return would still be due from the nominated company and each company would have to review payments on a monthly basis.

A small number of respondents questioned how a group arrangement would affect compliance issues, for example if one company in the group had their GPS removed. It was suggested that ownership requirements should mirror the same as for VAT grouping, that is, 51%.

Government response

The government acknowledges that many see a grouping arrangement as the best solution to addressing some of the administrative burdens of the CIS on groups with spasmodic reporting obligations. The government also acknowledges that a grouping arrangement would not remove the intra-group administration needed to give effect to a grouping arrangement.

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?

Responses were mixed as to where responsibilities in a grouping arrangement should sit. The majority favoured the nominated and individual companies sharing some responsibilities. Some thought that all reporting obligations should be with the nominated company, while the legal responsibility to operate the CIS should stay with the individual companies. A minority thought all legal responsibility for the group members to operate the CIS should sit with the nominated company. Others, however, felt CIS groups should act in a similar way to VAT groups, where each member remains jointly and severally liable.

Government Response

The government has considered the views of respondents and accepts that a CIS grouping arrangement should not require all members to have GPS, and members of the group should not be joint and severally liable. The government believes that a grouping arrangement should involve the nominated company having responsibility only for filing the CIS return and making payments to HMRC on behalf of the group.

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

Many respondents felt that there were no anomalies they could see arising in the context of CT and VAT grouping arrangements. Some felt that VAT grouping should be mirrored in terms of excluding intra-group payments. Others felt that the high ownership level should mirror VAT and CT grouping arrangements and this would mitigate some risks. One anomaly was that property groups do not always form a group in the same manner as CT or VAT as they are structured in non-corporate entities such as partnerships or unit trusts.

Government response

The government recognises the need to ensure that any CIS grouping arrangement does not create anomalies in terms of CT and VAT groups.

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

The majority of respondents felt that intra-group transactions should be excluded from the CIS group return. Some respondents felt that the reporting of intra-group payments provided little information for HMRC from a compliance perspective and that more useful information would be payments to external/third parties.

Government response

The government understands that the reporting of intra-group transactions is seen as administratively burdensome for group companies. The government is not currently minded to remove the reporting obligation of intra-group transactions in a grouping arrangement as it would significantly reduce supply chain visibility.

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

Most respondents agreed there would be an impact on third-party software providers. Many felt that the most likely impact would be the need to develop or update software to ensure it can compile and produce a new return. It was suggested that HMRC liaise with software providers on planned changes to determine the lead in times, costs, and impacts. These actions will allow businesses to prioritise resource and budget. It was noted that third party software providers previously made software changes due to prior HMRC changes to VAT and CT and may already possess some facilities from arrangements for these taxes.

Government response

Commercial software implications of a grouping arrangement would be fully considered during development of any grouping arrangement,

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

Responses to this question were mixed. Approximately half agreed the full process should be statutorily prescribed. It was felt this would allow HMRC to prescribe the arrangement and it would more effectively provide clarity for taxpayers on certification rules and responsibilities of companies. In addition, it would ensure there is a legislative benchmark by which all arrangements operate.

However, a similar number also said that joining a grouping arrangement should not be statutorily prescribed. A portion of these said that the eligibility criteria to join a grouping arrangement could be statutorily prescribed (if an entity wished to join one) and or the responsibilities of each party in the group. A few respondents felt that mandatory grouping may have commercial implications, for example, in the context of corporate transactions and debt financing.

Government response

The government has carefully considered the differing views of respondents. The government has concluded that any CIS grouping arrangement would need to be statutorily prescribed in regulations in order to provide clarity regarding respective roles and responsibilities.

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

A number of other issues raised included:

• grouping arrangement rules should allow for companies to be added or removed from the group in a simple manner. It was also suggested that this could be done via an online portal
• how verification of subcontractors would work under a grouping arrangement
• prescribing ownership levels would restrict who can benefit from a grouping arrangement
• HMRC must ensure that it has internal resource to process a grouping arrangement
• grouping arrangement rules should not be over-complicated as this will increase admin burdens and reduce the impact of the proposal
• non-corporate entities (such as partnerships and unit trusts) which are common in property funds, should be eligible for a grouping arrangement
• the efficacy of a grouping arrangement could be undermined if all the companies in a group use a different software

Government response

The government is grateful for respondents’ views, which have been useful in the policy development of a grouping proposal.

The government has concluded that any grouping arrangement would need to be IT based in order to be effective and efficient. A range of options have been explored to enable a grouping arrangement to be delivered in an optimum timeframe. However, the only viable solution, would require significant expenditure and would not be deliverable within an acceptable timeframe. This would not represent a cost-effective solution. The government will not therefore introduce a grouping arrangement, but will explore with the sector other ways in which the impact of the CIS on certain groups can be ameliorated and in a shorter time than a grouping arrangement.

Further simplification of the CIS

The government is aware that the administration of the CIS can sometimes be burdensome. In addition, what is in and out of the scope of the CIS can be complex and therefore determining the tax treatment can be time consuming and resource intensive.

The government invited views on ways that the scheme can be improved and digitalised. As the CIS is a revenue protection scheme, any simplifications must have regard to the risk to the Exchequer.

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

Many responded to this question with a number of areas for improvement as well as suggestions for simplification and digitalisation. Responses to this question fell into three broad categories:

• issues around the scope of the CIS
• CIS processes that can be simplified, some through digitalisation
• a number of other, more specific issues

There were a large number of issues raised and suggestions made. This document sets out the issues raised by multiple respondents. However, the government will continue to review all issues raised and the benefits of implementing the simplification suggestions.

Scope of the CIS

Many respondents raised areas of uncertainty around what is in the scope of the CIS, and to whom the CIS applies, requesting further clarification, for example through updated guidance.

Areas of uncertainty that were raised by a number of respondents included:

• who the CIS applies to
• the extent of statutory exclusions from the CIS
• requirements for CIS registration
• electrical charging points
• traffic management works
• modern methods of construction (MMC)
• dredging and other activities with coast defence
• archaeological works
• further detail and definitions of Regulation 22, which excludes certain contract payments from the CIS, in particular more detail on incidental use
• power plants and associate plants and hired plant and equipment
• interactions with the Domestic Reverse Charge

Government response

The government recognises that areas of uncertainty around the scope of the CIS are unhelpful and can have adverse commercial consequences. It will provide guidance and/or updates to the industry on these areas in due course.

The government is committed to understanding the implication of modern methods of construction for the current operation of the CIS. It is also committed to ensuring that in the future the CIS reflects the evolving nature of construction practices.

The government is grateful to members of HMRC’s Construction Forum for working to provide greater clarity on modern methods of construction.

Digitalisation

Many respondents suggested a number of existing processes that could be digitalised to ease administrative burdens and streamline processes both for customers and for HMRC. In addition, respondents suggested new digital processes.

Respondents identified a number of issues with current processes which are causing delays. As well as being administratively burdensome, which also has commercial impacts on customers. Certain entities such as trusts, partnerships and non-resident businesses experience uncertainties and delays more acutely than others. Respondents expressed frustration in not being able to contact the correct person in HMRC to deal with queries.

Digitalisation of existing processes:

• registration for contractors and subcontractors: resident and non-resident
• payments for subcontractors
• payment deduction statements
• agent authorisation codes
• move from CIS helpline to an email service
• deregistration from the CIS.

New digital processes:

• allowing contractors to check the status of subcontractors ahead of engaging them or of making payments
• introduction of an agent gateway
• notifying companies of status changes of subcontractors between net and gross payment status.

Government response

The government is committed to a digital tax system and the digitalisation of specific processes will be considered where this will bring the greatest benefits. The government will consider which CIS processes best lend themselves to digitalisation with the greatest customer benefits.

An identified area where significant customer benefit will be achieved is the digitalisation of registration and of applications for GPS. HMRC is in the process of developing a digital form which will allow electronic applications for CIS subcontractors. This will allow quicker applications and reduce administrative burdens for HMRC and for the industry.

The government will continue to review other processes which can be digitalised.

Deemed contractor rules

A number of respondents raised issues with deemed contractor rules. Respondents detailed the burdens of coming into the scope of the CIS where the majority of payments are exempt from the scope of the scheme. In addition, the process of deregistration from the scheme is seen to be unclear and in need of improvement.

Government response

Significant reforms to the deemed contractor rules were introduced in 2021 following public consultation. The government believes that the £3m threshold of expenditure on construction operations does bring those intended within the scope of the scheme.

However, the government acknowledges that the deemed contractor rules, particularly in relation to exempt payments and the requirement to register or ability to deregister, can be complex and cause uncertainty and administrative burdens. The government will review the current guidance and review whether updated guidance is necessary.

Nil returns

A number of respondents asked whether HMRC could review whether nil returns need to be filed and whether the 6-month period of notifying inactivity could be improved. Some respondents asked whether the process for autogenerating late filing penalties could be changed. Various suggestions were made as to how the process for contractors without a filing obligation in a particular month could be improved.

Government response

The government recognises that the nature of construction operations is such that contractors may not have a CIS reporting obligation each month, and that reporting obligations may be spasmodic for some contractors. In 2015 the obligation to file nil returns was removed but the government recognises that this has resulted in uncertainty and has not achieved the simplification for some contractors that the changes were intended to deliver. The government will explore options of how best to address this issue so that the process is simple and straightforward for contractors with no reporting requirements in a particular month.

Next steps

Since the consultation, the government has been considering the evidence submitted and has been using this to inform the policy and draft legislation to:

• add compliance with VAT obligations to the GPS compliance test
• expand the grounds for immediate removal of GPS for cases of fraud involving VAT, ITSA, CTSA, and PAYE (as well as CIS)
• remove the majority of payments from landlords to tenants from the scope of the CIS

The draft primary legislation has been shared with members of the Construction Forum for their views and legislation will be brought forward in the Autumn Finance Bill. Draft regulations will be the subject of a technical consultation in due course. These will relate to exceptions from compliance obligations for the purposes of VAT, and changed CIS exemption criteria for landlord to tenant payments. All legislation will come into force from 6 April 2024.

In addition to the legislative changes to the GPS test, the first review of GPS holders’ compliance will be brought forward from 12 months after application to 6 months, reverting to an annual check thereafter.

From 6 April 2024, GPS and CIS registrations and applications will no longer be available via telephone (apart from those who cannot apply digitally or via post). The government will move to mandate exclusively digital applications (whilst maintaining a route for the digitally excluded) in due course and with sufficient warning to the industry.

The lead-in time necessary for an IT solution to enable the grouping arrangement is such that it will not give affected groups the early benefits desirable. Accordingly, the government will continue to work with stakeholders to identify whether other measures to ease burdens can be introduced much more quickly.

The government will continue to review the further areas for simplification and/or digitalisation of the scheme, particularly identifying those which would result in the greatest benefits.

The government will seek to provide greater clarity in guidance where current guidance creates uncertainty.

Annex A: list of stakeholders

Allianz	AREF	Ashurst LLP
Att	Azets	BDO
BPF	British Land	Canary Wharf Group
CIG	CIOT	CLA
Deloitte	Derwent London	DWF LLP
Eversheds Sutherland	Fosters LLP	FSB
GPE	Grant Thornton	Grosvenor Group
ICEAW	IFA	IQ Student Accomodation
KPMG	Law Society of Scotland	Legal and General
Mishcon de Reya LLP	Moore Kingston Smith	Osborne Clark LLP
Morgan Sindall Group	PWC	RSM
Segro	Shoosmiths LLP	Squire Patton Boggs (UK) LLP
Travers Smith LLP	Turner & Co	Unite Students
Unite the Union

Annex B: advantages and disadvantages of proposed solutions

Revisit the distinction between CAT A and CAT B works – focussing on the underlying nature/intent of the payment.

A range of responses were received. Whilst one respondent thought it was a simple solution that would provide clarity, the majority were of the view that it would cause confusion by requiring the intention of the payments to be identified. Moving the boundary is only likely to create new issues, not solve the underlying issue.

Extend the scope of Regulation 22 (The Income Tax (Construction Industry Scheme) Regulations 2005) to include CAT A work as own work for landlords

This proposed solution was fairly popular as it was thought to be simple and easy to understand. The downside, however, was that it would require significant changes to Regulation 22, the consequences of which would need to be carefully considered.

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

Some respondents found this solution to be less open to manipulation and thought it would provide legislative certainty if carefully drafted. Others, however, were of the view that it would lead to greater complexity.

Widen scope of Regulation 20 to treat all landlord tenant contributions as reverse premiums 

Whilst this proposal was also fairly popular with respondents, it was regarded as having the disadvantage of introducing an unnecessary asymmetry with other taxes, which would simply complicate matters.

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’.

This solution was also popular among respondents being regarded as ‘simple and straightforward’. They thought its main disadvantage was that it would create a fiction as the commercial reality is that such payments are contract payments.

Grant automatic GPS to tenants

This proposal was not popular among respondents. Although it has the clear advantage of eliminating the withholding risk to tenants, thus not adversely impacting their cash flow, the disadvantages were even greater. They stressed the increased opportunity for avoidance and pointed out that the tenant company’s compliance records may not justify GPS status. It was also noted that the CIS administrative burden would remain the same.

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 a property.

This solution was also popular. Some respondents believed that the fact that it would replicate existing primary legislation that stakeholders were familiar with, would be an advantage. Others, however, commented upon the scope for manipulation, and thought that the additional complexity meant that other solutions were preferable.

Better education – prospective tenants should be made aware of the CAT A issue before they enter a lease.

Only a small minority of respondents favoured this solution. Few advantages were mentioned but numerous disadvantages were pointed out. These included the facts that better education will not reduce the complexity of the current legislation; nor would it resolve cash flow challenges. It is unlikely to be effective as the parties involved do not consider themselves to be in construction industry.