In a bid to root out widespread fraud within the Construction Industry Scheme (CIS), the government has announced stringent measures set to take effect from April 2024.
This crackdown aims to close a £300 million loophole exploited by organised crime gangs, marking a pivotal moment for the construction industry.
The “gross payment status” provision under CIS is at the core of the issue, allowing subcontractors to bypass tax deductions at source. While this facilitates cash flow for legitimate businesses, it has also created fertile ground for criminal activity.
Gangs have exploited this system by submitting fake invoices and channelling money through intricate subcontractor chains, resulting in millions in unpaid VAT and CIS deductions.
To combat this rampant fraud, the government has mandated VAT compliance for obtaining or retaining gross payment status. This significant change requires subcontractors to demonstrate adherence to VAT regulations, effectively tightening the noose around fraudsters and making it increasingly challenging for them to operate under the radar.
Reactions to the move have been mixed within the industry. While the Federation of Master Builders welcomes the crackdown on fraud, some contractors express concerns over heightened paperwork and potential delays. Nonetheless, the government remains steadfast, emphasising that curbing criminal activity is imperative for safeguarding legitimate businesses and ensuring a level playing field.
Exchequer Secretary Gareth Davies asserts, “This measure is predicted to raise around £300m over the next five years.”
Tracey Wright, head of tax at law firm Osborne Clarke, highlights the significance of the shift, stating, “It brings in the right to remove gross payment status if there are VAT-compliance failures or fraud.” She suggests that incorporating VAT into the compliance test will likely make it easier to catch those seeking to defraud the system.”
The CIS has faced scrutiny in the past, with critics accusing it of being a tool for employers to evade National Insurance contributions. However, the government maintains that CIS remains an essential tax collection tool in the construction sector, and the latest changes are crucial to plugging a significant loophole.
The full impact of these new regulations remains to be seen, but one thing is certain: the days of easy pickings for CIS fraudsters are numbered. With increased scrutiny and stricter compliance requirements on the horizon, the construction industry is poised to become a less hospitable environment for criminal activity.
