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Businesses operating in the construction industry – be they companies, partnerships or self-employed individuals – may be contractors or subcontractors: subcontractors are businesses paid to carry out building work for contractors.  Under the construction industry tax deduction scheme – which was introduced in 1971 – contractors have had to make a deduction from any payment made for work done by a subcontractor, to be set against the subcontractor’s liability for tax and National Insurance contributions (NICs). Under certain circumstances subcontractors have been entitled to receive payment gross of tax, under what was commonly known as the ‘lump scheme’.  Significant changes to these rules were announced in February 1994, following concerns that the lump scheme was being exploited to evade tax.  Legislation was introduced under schedule 27 of the Finance Act 1995 and section 178 of the Finance Act 1996, and the new construction industry scheme (CIS) came into operation on 1 August 1999.

In the 2003 Budget the Labour Government announced that a reformed CIS would be introduced from April 2005, following complaints about the scheme’s processes and the compliance costs faced by businesses.[1]  Provision to this effect was made in the Finance Act 2004 (ss 57‑77, schedules 11 & 12),[2] though implementation of the new scheme has been delayed twice: first to April 2006, and then to April 2007.[3]  Detailed guidance material on the CIS is collated on

Since these reforms there has been relatively little comment on the operation of the CIS, though in October 2010 HMRC published research which suggested that in the main the new scheme had met its policy aims.[4] More recently, following a consultation launched in the March 2020 Budget, in November 2020 the Government confirmed it would introduce legislation to tackle abuse of the CIS rules.[5] Provision to this effect is included in the Finance (No.2) Bill 2019-21 (specifically clause 30 & Schedule 6).

At the time of the Spring 2017 Budget the Government launched a consultation on options to mitigate the risk of indirect tax fraud in the construction sector – specifically, applying a VAT ‘domestic reverse charge’ mechanism. This is an anti-fraud measure which transfers the responsibility for accounting for VAT on specified goods and services from the supplier to the customer. The consultation also asked for views on tightening the rules around gross payment status (GPS) within CIS: that is, the criteria that subcontractors must satisfy to receive payments gross of tax. In the 2018 Budget the Government announced it would introduce a VAT reverse charge from 1 October 2019.[6]  

Provision for the new VAT rules has been made by secondary legislation,[7] though the introduction of the reverse charge was deferred twice and came in from 1 March 2021.[8]

Notes : 

[1]     Budget 2003, HC 500, April 2003 para 3.29

[2]     The operational detail of the new scheme was set out in secondary legislation: the Income Tax (Construction Industry Scheme) Regulations SI 2005/2045.

[3]     Pre-Budget Report, Cm 6042, December 2003 para 3.48; HC Deb 19 October 2005 c1106W. HMRC launched a campaign on the new scheme in late 2016 (HMRC press notice NAT 68/06, 10 November 2006).

[4]     HMRC, Evaluating the Construction Industry Scheme : Research Report 106, October 2010

[5]     HMRC, Changes to tackle Construction Industry Scheme abuse, 12 November 2020. See also, HMT, Overview of tax legislation & rates, March 2021 (Table 1: Unchanged measures for Finance Bill 2021)

[6]     Budget 2018, HC 1629, October 2018 para 3.72; see also, HMRC, Fraud on provision of labour in construction sector: consultation on VAT and other policy options , 1 December 2017

[7]     The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order SI 2019/892

[8]     HMRC, Revenue and Customs Brief 10 (2019), 6 September 2019 & Revenue & Customs Brief 7 (2020), 5 June 2020. See also PQ69716, 14 July 2020; PQ161764, 8 March 2021

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