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HMRC Changes CIS Rules to Simplify Construction Transactions

Published by Prerana
Published Date: April 23, 2024

HMRC has issued a series of updates to the Construction Industry Scheme (CIS) rules, which came into effect on 6 April 2024. These changes stemmed from consultations with industry experts and are expected to simplify transactions while ensuring compliance with tax obligations. They are also hoped to improve cash flow and streamline operations within the construction industry.

How Can Contractors Benefit from CIS Rule Changes?

The gross payment status compliance test is a major change in the CIS rule. This change allows contractors to receive full payments without having to deduct CIS tax upfront, thus significantly boosting cash flows.

The previous rule required contractors to fulfil the following test conditions:

  • Compliance Test: Contractors had to have filed and paid tax and national insurance/PAYE on time in the previous 12 months.
  • Business Test: Contractors had to fall under the CIS regime and have a bank account.
  • Turnover Test: The company had to have a turnover of at least £30,000 in the past 12 months, regardless of whether it was a sole trader company or a partnership.

What Is the New Compliance Test?

The introduction of the new compliance test - the VAT compliance test -introduces changes from the previous CIS framework. The contractors now need to file and pay their VAT returns on time to maintain their gross payment status. This new rule is more focused on late filings or payments, which reduces the hassles for contractors.

Contractors Benefit From CIS Rule Changes

Also, the VAT compliance test provides for occasional late payments by making the following arrangements:

  • The contractor can file three overdue payments of no more than 28 days late VAT returns or,
  • The contractor can make a late payment of no more than 14 days if the VAT liability is less than £100.

When Will the New VAT Compliance Test be Implemented?

The new VAT compliance test was implemented on 6 April 2024 for both new and existing contractor applicants. As long as the existing contractors comply with the existing tax/PAYE and new VAT rules, their gross payment status remains unaffected. If a contractor comes off gross payment status, they have a grace period of 35 days to revert to making deductions on payments based on the CIS rules.

Contractors CIS tax

HMRC verifies the gross status applications within 12 months however, for new contractors, their initial review will be after six months, and then they get to the normal 12-month period.

Conclusion

As HMRC implements new rules to the CIS framework, contractors need to familiarise themselves with the VAT compliance test. The new rule allows contractors to receive full payments without having to deduct CIS tax. Also, the VAT compliance test ensures that maintaining the gross payment status is more lenient than the previous rule. By staying informed and proactive, contractors can confidently navigate the evolving landscape of Gross Payment Status while remaining compliant with HMRC regulations.

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