Hudson Contract has warned that government reforms to the Construction Industry Scheme (CIS) could be “disastrous” for small businesses and specialist subcontractors in the supply chain.

Last month’s Autumn Statement revealed the government plans to add VAT as part of the Gross Payment Status (GPS) compliance test, giving HMRC more power to remove GPS immediately in cases of fraud.

Treasury beancounters expect the move to raise £320 million over the next five years.

Ian Anfield, managing director of Hudson Contract and an expert on tax and employment matters in construction, said: “Including VAT compliance in gross payment tests is aimed at tackling VAT fraud. But it is unlikely to prove effective and instead will just create more red tape and headaches for small businesses and specialist subcontractors in the middle of supply chains.

“The VAT domestic reverse charge for construction has been a complete mess and has crippled the cash flow of good businesses while many HMRC inspectors do not understand the rules. Because of the reverse charge, thousands of companies have moved from paying VAT bills each quarter to claiming VAT refunds. The changes set alarm bells ringing in HMRC’s steam-powered computer mainframe and inspectors are sent out to investigate. The investigations can drag on for months and any refunds are blocked in the meantime.

“The decision to add VAT to CIS gross status tests will now mean those in dispute or simply under investigation because of legitimate changes to their VAT profile could also see their CIS gross status removed, destroying their cashflow.

“And to add insult to injury, if they are subject to net payments under CIS, their clients will be faced with a 1.25 per cent CITB levy bill on their invoices – which they will pass down the line.

“Most of the VAT queries and disputes we have seen have been resolved in the taxpayer’s favour so there must be strict curbs on how HMRC uses these new powers or the outcome will be disastrous.”

The government said it would also be announcing simplifications to other aspects of the scheme, which will be subject to technical consultation.

For advice on how the changes might affect you, feel free to call us on 0800 054 1127 or email payroll@hudsoncontract.co.uk