Construction Industry Scheme (CIS) past, present and future?

01 August 2017

Prehistoric times: 1971-1998

The construction industry is a business sector which traditionally has been regarded to have serious compliance issues.  Self-employed workers were paid gross and the temptation to “forget” to register with Inland Revenue as self-employed was too much for many to resist. False names were routinely given to contractors requiring a signature for the cash being paid out – in my distant past life as an Inland Revenue Investigator I recall being told on my very first training course that “Mickey Mouse” had constructed more buildings in the UK than he had made cartoons!

In 1971 Inland Revenue had its first go at tackling the problem – the Construction Industry Tax Deduction Scheme. Established subcontractor businesses with reasonable compliance records were given certificates to enable contractors to pay them gross. Subcontractors were given vouchers which effectively acted as official receipts for the whole process, the idea being that Inland Revenue would have a paper trail to follow. Unfortunately, organised crime groups and, in Northern Ireland, paramilitary organisations were not slow to see the shortcomings of a tax system heavily reliant on the production of easily-forgeable exemption certificates, and, by the late 1990s official estimates suggested that the loss to the Exchequer was running in the region of £50m a year. And, in private, those responsible for the official estimates would usually concede that even this figure was probably optimistic.

Something had to be done.

The recent past: 1999-2006

After several delays the new Construction Industry Scheme was launched in 1999. Although still certificate-based, the new scheme applied more rigorous turnover and compliance tests to businesses wanting to receive gross payments. The scheme also required subcontractors to register with Inland Revenue – and introduced penalties for contractors who made payments to unregistered subcontractors, though again proof of registration was still document-based.

There were still concerns over the scheme’s continued reliance on paper documents. From the Revenue point of view it was thought that contractors were ignoring their responsibilities to consider employment status and that the holding of a registration card was being treated as an automatic indicator of self-employment. The Revenue also continued to have concerns as to the fraudulent use of CIS documents. 

From the industry’s point of view subcontractors were unhappy that the rules required them to present CIS documents to contractors in person  - often resulting in extensive travel costs, whilst those contractors who supported employment status complained that they were at a competitive disadvantage to those who did not.

Something had to be done. Again.

Modern times: 2006-the present

The increase in access to the internet in the years that followed the introduction of CIS paved the way for the next stage in the scheme’s evolution. After (the now traditional) delays the current version of CIS was finally introduced in 2007. The main features of the new scheme were:

A change from a certificate-based scheme to a requirement for contractors to verify subcontractors with (what by now was called) HMRC either by telephone or, later, online;
The strengthening of the requirement for contractors to show that employment status had been considered prior to operating CIS;  and
The introduction of three classes of subcontractor; those with Gross Payment Status, verified (20% deduction) subcontractors and unverified (30% deduction) subcontractors.; 
Save for some amendments to the turnover and compliance tests for gross payment status this version of CIS is the one in place today. So all is now well? Er, not exactly. The problem is that Income Tax and National Insurance are not the only taxes targeted by the unscrupulous.

The first of 2017’s budgets promised a new consultation on CIS, which was duly launched on 20 March. The consultation noted that:

Historically, fraud in labour supply chains in large construction projects mainly concerned the evasion of the direct taxes which CIS is designed to address…

….[HMRC is aware that]  organised crime groups are setting up businesses with the intention of fraudulently failing to pay VAT and making incorrect income tax deductions…. 

Or, in other words, something has to be done. Again.

The future: 2018?-?

The Government’s current concern has its parallels in the pan-European “missing trader” and “carousel” VAT frauds of the not too distant past. Put simply, goods would be bought and sold, moving across EU member states in the process and, whilst all the companies in the (usually lengthy) supply chain would waste no time in retrieving any reclaimable VAT along the way, the company at the end of that chain that was due to pay over the VAT collected would go missing, taking the VAT with it.

The method of countering such fraud was the introduction of the “reverse charge” for VAT. The fraudsters typically targeted small, high value goods such as mobile telephones and computer chips. By transferring the responsibility for paying VAT in respect of such goods from the vendor to the purchaser in the supply chain, the authorities effectively collect the VAT due out of the refund they would normally pay to the purchaser.

The current consultation proposes that a similar “domestic reverse charge” should be applied to VAT in CIS contracts. This will not be as simple as it sounds – different VAT rates can apply depending on the type of project involved and on the type of customer. 

Further changes to the tests for gross payment status are also proposed, with the aim of making the setting up of artificially long supply chains a lot more difficult. Such changes might involve the imposition of sterner turnover tests for new businesses and for those companies where there has been a change of ownership.


The HMRC consultation concluded in June 2017. As yet there has been no announcement as to what will happen next, but, with two Finance Bills to be introduced between now and the start of 2018-19, it would not be a major surprise to see further changes to CIS introduced sooner rather than later.

For further information please contact Gordon Thrower or send us an online enquiry.

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