Strengthening the tests for gross payment status for the Construction Industry Scheme
Published 22 November 2023
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Who is likely to be affected
The measure will impact individuals and businesses required to register under the Construction Industry Scheme (CIS) and who apply for, or hold, gross payment status.
General description of the measure
The measure will add compliance with VAT obligations to the statutory compliance test for being granted, and for keeping, gross payment status. A core feature of the CIS is that contractors must make deductions on payments made to subcontractors and pay the withholding tax to HMRC. However, subcontractors that apply for and obtain gross payment status can receive payments from contractors gross, with no withholding tax deducted.
The measure also extends one of the grounds for immediate cancellation of gross payment status. It adds VAT, Corporation Tax Self-Assessment (CTSA), Income Tax Self-Assessment (ITSA) and PAYE to those taxes where HMRC is able to withdraw gross payment status if they have reasonable grounds to suspect that the gross payment status holder has fraudulently provided an incorrect return or incorrect information.
Policy objective
The measure will tackle serious non-compliance within the construction sector, particularly supply chain fraud involving CIS and VAT. It will both protect the Exchequer and create a fairer construction sector as fully compliant subcontractors will not have to compete with subcontractors who are non-compliant with VAT obligations.
Adding compliance with VAT obligations to the compliance test will strengthen the test so that only individuals, firms and companies who are compliant will be granted and be able to retain gross payment status. In keeping with current legislation, minor VAT compliance failures will not be taken into account when determining gross payment status. The addition prevents the seriously non-compliant from receiving gross payment status, while minimising the impact on compliant businesses. Existing appeal rights regarding refusal to grant gross payment status or the removal of gross payment status will extend to refusal or removal on the grounds of VAT non-compliance.
The measure will further protect the CIS from abuse, particularly where that abuse involves VAT.
Background to the measure
In order to gain and maintain gross payment status, subcontractors must pass three tests:
- compliance
- turnover
- business
The compliance test currently comprises compliance with certain CIS, PAYE, ITSA and CTSA obligations.
Following engagement with HMRC’s Construction Forum, the government published a consultation on CIS reforms on Tax administration and maintenance day 2023. One of the proposed reforms was strengthening the tests for gross payment status in the CIS. The consultation opened on 27 April and concluded on 20 July 2023. Following analysis, the Summary of Responses was published at Autumn Statement on 22 November 2023.
This measure comprises one of a number of reforms of the CIS resulting from the recent CIS Reform Consultation. The other reforms, also to come in from 6 April 2024, are
- the removal of the majority of landlord to tenant payments from the scope of the CIS
- digitalising applications for CIS registration
- bringing forward the first review of a gross payment status holder’s compliance history from 12 months after application to 6 months, reverting to 12 months thereafter
Detailed proposal
Operative date
The measure will have effect from 6 April 2024.
Current law
Current law is contained in Sections 64 to 67 of Finance Act 2004 and Paragraphs 4, 8 and 12 of Schedule 11 to Finance Act 2004.
Proposed revisions
The measure will add compliance with VAT filing and payment obligations to the current compliance test as set out for individuals, firms, and companies in Paragraphs 4(1)(a), 8(1)(a) and 12(1)(a) of Schedule 11 to Finance Act 2004 respectively. A gross payment status applicant or holder must meet these conditions, together with others set out in Part 3, Chapter 3 of Finance Act 2004, in order to be granted or retain gross payment status.
The measure will also add to Section 66(3) of Finance Act 2004. The legislation provides for HMRC to cancel gross payment status registration for individuals, firms, or companies with immediate effect. The measure will extend S66(3)(ii) to cover returns or information relating to provisions under VAT, PAYE, ITSA and CTSA legislation.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 |
|---|---|---|---|---|---|
| Nil | +50 | +95 | +75 | +60 | +40 |
These figures are set out in Table 5.1 of Autumn Statement 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2023.
Economic impact
The measure is not expected to have any significant macroeconomic impact.
Impact on individuals, households and families
The measure impacts business owners who engage in VAT non-compliance or fraudulent behaviour. It will have limited impact on compliant business owners, particularly as there will be appeal rights and gross payment status is not removed where there is a reasonable excuse for any compliance failures.
As such, the measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that any of the proposed reforms will have an impact on those groups sharing protected characteristics.
Impact on business including civil society organisations
This is expected to impact non-compliant businesses, where gross payment status is removed due to VAT non-compliance, or fraudulent behaviour. Any future payments received from contractors will be subject to a 20% withholding. However, gross payment status will only be removed for cases of severe and repeated non-compliance. There will be a number of minor failures that can be overlooked, set out in regulations. There are appeal rights and gross payment status is not removed where there is reasonable excuse for any compliance failures.
There are expected to be no impacts on compliant businesses beyond familiarisation with new gross payment status requirements.
This measure is not expected to impact on civil society organisations.
Operational impact (£ million) (HMRC or other)
The measure will require changes to HMRC IT systems to support safe implementation of these proposed changes. There will also be a requirement for two full time equivalent resources. Overall, the changes are expected to cost in the region of £2.81 million over the scorecard period.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC will monitor and evaluate the effectiveness of the measure. Evaluation will involve analysing data on gross payment status application, refusals and cancellation and the impact on fraud.
Further advice
If you have any questions about this change, please contact Isobelle Byrne or the CIS Policy Team by email cisconsultations@hmrc.gov.uk