Under the construction industry scheme (CIS), contractors and deemed contractors must withhold deductions from payments made to subcontractors who do not hold gross payment status (GPS), at either:
- 20% (the standard rate); or
- 30% (if the recipient is not registered for CIS or cannot be verified).
To obtain GPS and therefore receive payments without any deductions, subcontractors must meet certain requirements. One of these requirements (the compliance test) includes that all CIS and direct tax returns and payments (excluding certain income tax and corporation tax self-assessment payments) must be:
- correct; and
- submitted by the applicable deadlines.
Once granted, HMRC performs an annual automated compliance check to establish whether the subcontractor still qualifies for GPS, and if the subcontractor is not compliant with its relevant tax obligations, GPS can be withdrawn. It then cannot be reapplied for within 12 months. Recently enacted legislation (FA 2024, s 35) changes the GPS tests.
Changes from 6 April 2024
- VAT returns and payments are added to the compliance test for GPS status to be obtained and kept by a subcontractor.
- The grounds for immediate removal of GPS in cases of fraud include fraudulent returns or information provided in respect of any VAT, corporation tax self-assessment, income tax self-assessment, or PAYE obligations.
Any VAT failures that occur prior to 6 April 2024 will not be considered as grounds to cancel GPS for existing holders. Other GPS changes that will be implemented include:
- advancing the first compliance check for GPS holders to six months after application (currently, it is 12 months); and
- changing how to apply for GPS by introducing digital applications.
Regulation 9
Regulation 9 of the CIS regulations (SI 2005/2045) allows HMRC to issue a direction that relieves a contractor of their CIS liability where certain conditions are met, including where the failure to make a deduction arose from:
- an error made in good faith; or
- a genuine belief that the payment was outside the scope of CIS.
However, the contractor must have taken reasonable care to comply with the CIS regulations for this to apply.
The Access Contracting Services Ltd Case
In Access Contracting Services Ltd v Revenue and Customs [2023] UKFTT 973 (TC), the appellant provided the labour of tradespeople. In 2011, the person who had overseen compliance (including CIS returns) for the firm retired, handing over duties to the office manager, who had previously assisted him. In 2014/15, the company started work with some new clients. The office manager confirmed the CIS status of each with HMRC. They should have been subject to CIS deductions, but the appellant made payments gross and filed CIS returns on that basis. HMRC sought to recover almost £450,000 of under-deducted CIS tax and imposed penalties of 21.75% (£97,000) based on a careless inaccuracy with prompted disclosure. HMRC did not apply the maximum penalty reduction for ‘telling’ and ‘helping’.
Compliance Failures But Reduced Penalties
There were no checks or controls on the office manager’s CIS compliance for what were substantial payments (over £700,000 in 2015/16). Due to the significant impact that failing to comply with the CIS regulations would have on the company and the lack of controls and checks in that respect, the appellant had not acted with enough reasonable care to comply with the regulations. A regulation 9 direction to relieve it of its liability was therefore inappropriate. However, the appellant had been in regular contact with HMRC and had provided all information that it could, so the maximum penalty reduction for ‘telling, helping and giving’ should have been applied.
Practical Tip
Subcontractors who currently hold (or plan to apply for) GPS should review their VAT compliance to check whether they are at risk of having their GPS withdrawn or an application refused.
