In this article

• An introduction to the CIS
• Deducting tax at source
• Gross Payment Status (GPS) and the compliance test
• Changes from 2024

An introduction to The Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) requires contractors who engage other contractors/sub-contractors to deduct tax at source from payments made to them unless that contractor/sub-contractor has ‘gross payment status’.

The Scheme sets out the rules for how contractors and certain other businesses in the construction industry must handle payments to subcontractors for construction work.

The Scheme covers all types of businesses that work in the construction industry, including companies, partnerships and self-employed individuals. Under the Scheme, the terms ‘contractor’ and ‘subcontractor’ have special meanings that cover more than is generally referred to as ‘construction’. See HMRC’s guidance Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340)

The CIS covers all construction work carried out in the UK (and UK territorial waters up to a 12-mile limit), including jobs such as site preparation, alterations, dismantling, construction, repairs, decorating and demolition.

While the Scheme does not apply to construction work outside the UK, a business based outside the UK and carrying out construction work within the UK is within the Scheme and must register accordingly.

CIS applies to contractors and subcontractors, so if you’re a contractor or a business that has spent over a certain amount on construction, you must register for CIS. You’re considered a contractor under this Scheme if:

• You hire subcontractors to perform some of your contract work.
• You don’t run a construction business, but you’ve spent over £3 million on construction in the 12 months since making your first payment.

Subcontractors aren’t required to register for CIS, but if you register for CIS as a subcontractor, HMRC calculates deductions at 20% instead of 30%. It means you’ll pay a lower amount to HMRC every month.

Note that the Scheme does not apply to payments made to employees — this is covered by the PAYE system.

Deducting tax at source

Under the Scheme, all payments made from contractors to subcontractors must take account of the subcontractor’s tax status, as determined by HMRC. This may require the contractor to make a deduction from that part of the payment that does not represent the cost of materials incurred by the subcontractor. They then pay that deduction to HMRC.

Gross Payment Status (GPS) and the compliance test

Contractors don’t have to deduct tax at source if a contractor/sub-contractor has ‘gross payment status’ (GPS). This status means those businesses/individuals can receive their payments in full without any deductions. They are then responsible for managing their own tax and National Insurance contributions.

GPS is acquired by registering and successfully completing the GPS compliance criteria. This includes:

1. A Business Test: The construction work must be undertaken in the UK and run through a bank account.

2. A Turnover Test: There’s a threshold for the turnover from construction work. HMRC evaluates your past year’s turnover, excluding VAT and material costs, and the required turnover is:

• £30,000 for sole traders.
• £30,000 per partner in a partnership or a minimum of £100,000 for the entire partnership.
• £30,000 per company director or a minimum of £100,000 for the entire company.
• For companies controlled by 5 or fewer people, the annual turnover must be £30,000 for each individual.

3. A Compliance Test: You must show a good record of tax returns and payments for the previous 12 months. That means no late submissions, unpaid taxes or overdue amounts.

Be aware that HMRC reviews the status annually, so a business with GPS status must continue to meet these criteria. For more on registering, refer to this HMRC guidance.

Changes from 2024

1. VAT included in the compliance test

For the compliance test part of the GPS assessment, having a clean tax record historically didn’t include any VAT misdemeanours, and these were ignored.

This has changed from 6 April 2024, and a clean tax record also requires a clean VAT record. For existing GPS holders, the compliance test will only consider VAT compliance from 6 April 2024.

There are, however, some exceptions in line with other taxes. The following failures will be overlooked: 

• 3 late submissions of VAT returns — up to 28 days late 
• any late payment of VAT where the amount is under £100 
• 3 late payments of VAT liability of £100 or more — up to 14 days late

Existing appeal rights will apply, and GPS will not be removed where there is a reasonable excuse for any compliance failures. HMRC is also bringing forward the first compliance review from 12 months after application to 6 months. After this point, it will revert to 12 months.

2. Fraudulent returns and information

The grounds that HMRC can immediately cancel GPS in cases of fraud will be extended to include VAT, Corporation Tax Self Assessment (CTSA), Income Tax Self Assessment (ITSA) and PAYE (Pay As You Earn).

If HMRC has grounds to suspect that the GPS holder has fraudulently provided an incorrect return or information about any of these taxes, GPS can be immediately removed. Existing appeal rights will apply

3. Landlord-to-tenant payments

To reduce administrative and financial burdens on landlords and tenants, most landlord-to-tenant payments for construction work will no longer be within the scope of the CIS. 

Payments made under a construction contract by a landlord to a tenant from 6 April 2024 will be outside the scope of the CIS, where:

• the payment is made by or on behalf of the landlord
• the person receiving the payment is a tenant or prospective tenant of the landlord
• the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter a lease
• the tenant that occupies or will occupy the property will carry out the construction operations itself, or a third person is contracted to carry out the construction operations
• the payment is for construction work intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease

These new rules supplement existing rules that exempt reverse premiums from the CIS, widening the range of contract payments outside of the CIS.

4. Subcontractor registrations and applications for GPS

A new digital form for subcontractor registration and GPS applications will be introduced. Supporting evidence can be uploaded, and applications can be saved and returned. From this time, subcontractors will no longer be able to register for the CIS or apply for GPS over the telephone unless digitally excluded.

Summary

Gross Payment Status (GPS) can be a complex area, but acquiring it can bring cash-flow benefits and kudos in the sector. If you need help getting your finances in order to apply, or have a query with your involvement in the Construction Industry Scheme, chat with one of our specialists shown on this page.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.

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