Under the changes subcontractors will now have their VAT records checked as part of the CIS compliance test.

Currently subcontractors have to only pass compliance checks on turnover and business tests to get paid gross under the scheme.

The government said the addition of the VAT checks will give “HMRC more power to remove Gross Payment Status immediately.”

Ian Anfield, managing director of construction payroll company Hudson Contract said: “Including VAT compliance in with gross payment tests is aimed at tackling VAT fraud.

“However it is unlikely to prove effective and instead it will just create more red tape and headaches for small businesses and specialist subcontractors in the middle of supply chains.

“The VAT reverse charge for construction has been a complete mess and has seen good businesses having their cash flows crippled whilst HMRC inspectors do not understand the rules.

“The change to add VAT to CIS gross status tests will mean that those in dispute with HMRC could also see their CIS gross status removed.

“Most of the VAT queries and disputes we have seen have been resolved in the taxpayers favour so there must be strict rules and curbs on how HMRC use these new powers or the outcome will be disastrous.”