Changes to HMRC’s Construction Industry Scheme (CIS) are a ticking time bomb for construction firms, Hudson Contract has warned. From April, the taxman is adding VAT compliance to the test for gross payment status being granted and retained. 
 
Holding gross status allows construction businesses to be paid the full value of their invoices, as would happen in other industries, without suffering the dreaded 20% CIS deduction known as ‘being paid net’.
 
Hudson’s managing director Ian Anfield said: “Adding VAT compliance to the gross status test may sound logical, however VAT in construction is hugely complex. 
 
“Not content with having different VAT rates and exemptions for different types of building work and even parts of construction schemes, in 2021 HMRC introduced the domestic reverse charge which has really set the cat amongst the pigeons.
 
“Construction firms which get the VAT domestic reverse charge wrong not only face retrospective VAT bills, but could also have their gross payment status removed. This would cripple their cashflow and be financially catastrophic.
 
“HMRC is as busy as it ever has been launching VAT enquiries on construction firms. Because of the complexity, HMRC assumes wrongdoing and it is up to the taxpayer to prove they have done things correctly. Most of the cases we have seen have eventually been closed without finding any wrongdoing.
 
"Under these new rules, well-run compliant businesses could have their gross payment status unnecessarily suspended, which would hurt cash flow, damage customer relationships and could leave their clients with a hike in CITB levy payments they would no doubt look to pass down the tree.”
 
Mr Anfield said the domestic reverse charge continues to cause confusion and headaches for construction firms but there is no sign of HMRC doing anything about it. 
 
He added: “We are seeing some large payroll providers claiming they can apply the reverse charge without legal justification. So-called commercial contractors are using non-payment of VAT as a selling point but have clauses in their contracts stating if they get the tax treatment wrong, they have the right to invoice the user later.
 
“They are leaving their clients with huge potential problems further down the line. Anyone using a payroll firm which calls itself a contractor and does not charge VAT needs to take urgent independent advice.”
 
The CIS reforms affecting gross status also include the end of telephone applications for new CIS registrations. From next month, all applications must be made either digitally or in writing which will greatly slow things down.