HMRC has officially launched a consultation into simplifying the construction industry scheme (CIS) and preventing fraud.
The consultation, which runs until 20 July 2023, seeks opinions on the complexities of CIS payment systems and how to reduce the administrative work involved in the scheme.
HMRC will also focus on the following:
- strengthening the gross payment status (GPS) tests to prevent fraud partly by adding VAT
- to the compliance tests
- simplifying the treatment of payments to tenants from landlords
- reducing the admin burden for some contractors
- further simplification of the CIS.
Tackling VAT tax fraud
Since the publication of a previous consultation into fraud in the construction sector, HMRC has identified evidence of consistent GPS fraud.
In the schemes, criminal groups use false invoices to pass payments down the supply chain, costing HMRC in both CIS deduction tax payments and VAT.
HMRC suggested three measures to counteract abuse of the CIS system:
- introducing a VAT compliance test for GPS applications
- bringing forward the first annual review of compliance history, and
- mandating the GPS application process.
HMRC estimates that 16% of the active GPS ‘population' would be non-compliant on VAT grounds if the compliance test were changed today, costing the Treasury in lost tax revenue.
Payments to tenants
To simplify the treatment of payments made by landlords to tenants, HMRC proposed to revisit existing legislation.
Landlords currently often make payments to tenants for work required for the rental property that fall into two main categories:
- works that are the responsibility of the landlord
- works funded by the landlord, which benefits the tenant's business (often called reverse premiums).
The landlord currently decides whether the CIS applies to a payment between them and their tenant.
According to HMRC, this causes problems. It said:
"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.
"Being within CIS is administratively burdensome for both the landlord and the tenant, and receiving payment under deduction of tax adversely impacts the cashflow of the tenant."
HMRC is inviting CIS taxpayers to suggest how the scheme can be simplified, saying it might:
- introduce new, or amend existing legislation to remove payments from the scope of CIS
- remove requirements to operate CIS
- educate and inform prospective clients to make them aware of the issue with the CIS.
HMRC is also exploring ways to simplify the administrative process for group reporting by decreasing the amount of paperwork involved.
According to HMRC, property groups composed of multiple companies spend "considerable time" deciding who needs to file a return due to subcontractor pay. Many also file a nil return to avoid a late filing penalty, despite there being no legal requirement to do so.
The consultation posits whether a ‘grouping arrangement' will make things easier for property groups working under the CIS.
Should this go ahead, the group will only have to submit one monthly return, which covers all payments made under the CIS by companies in the group.
The consultation is now open and will run until 20 July 2023. HMRC invites contractors, the wider construction sector and agents to respond.
Get in touch to discuss your CIS obligations.