Building blocks: the construction industry scheme

HMRC’s Construction Industry Scheme (CIS) requires UK businesses who undertake construction work to register for the scheme – and, subject to their status, withhold tax on payments made to subcontractors in respect of the construction work. Originally introduced in the 1970s, the most recent version of the CIS rules were introduced on 6 April 2007 – although adjustments to those rules came in from 6 April 2021 – to get the employment status of workers right, and increase compliance.

Under the CIS remit

CIS doesn’t just apply to businesses whose main line of work is construction, explains Matt Harrison, BDO employment tax senior manager. “CIS has a broad scope, and covers works which may not typically be construction-related, such as site cleaning,” he says.

The regime also applies to overseas businesses undertaking construction work in the UK. Lee Knight, RSM tax director, explains it applies to payments made under contracts which include ‘construction operations’ undertaken within the UK, or UK territorial waters, from contractors or deemed contractors (making payments) to subcontractors (receiving payments). CIS also applies to ‘deemed contractors’, Knight adds. “A deemed contractor is any business or other type of body that is not a mainstream contractor – for example, restaurant chains and local authorities – but whose cumulative VAT-exclusive expenditure on construction operations within the previous 12-month period exceeds £3m.”

Once they expect to exceed or do exceed this threshold, a deemed contractor can then be immediately expected to operate CIS. Where it applies, HMRC instructs the contractor to deduct tax at either 0%, 20% or 30%, and submit monthly returns of payments and any deductions: “The rate of tax deducted by a contractor depends on the status of the subcontractor, and this provides an incentive for the subcontractor to register with HMRC under CIS.”

Matt Harrison confirms CIS can also apply to manufacturers, banks, supermarkets, retailers and other large businesses spending signifi cant amounts on construction, and that businesses required to register must do so as either a contractor, subcontractor, or both. “Once registered, contractors who pay subcontractors to undertake construction work are required to check the tax status of their subcontractors with HMRC, and where relevant make deductions from these payments, complete monthly CIS returns and send both to HMRC,” he explains.

Recent changes

Harrison says recent changes in tax legislation have bought CIS more into focus for businesses whose main line of work is not in construction. As well as the deemed contractor rules and threshold which came into force from 6 April 2021, there are other non-CIS changes affecting the regime. “HMRC’s new VAT domestic reverse charge for construction services came into force on 1 March 2021, but one of the main tests businesses have to consider under this legislation is whether the supply is caught under the CIS regime,” he says.

HMRC also introduced updated regulations on the treatment of materials which have applied since 6 April 2021. “These clarify that a deduction for materials will only be allowed where the subcontractor has directly purchased materials for that specific job.” Harrison adds that HMRC has introduced a number of anti-avoidance measures to counter perceived fraud and misrepresentation by some employers and/or agents in their duty to comply with the CIS regime.

Potential pitfalls

Lee Knight lists other pitfalls to look out for, which include:

• Not registering for and applying CIS as a contractor at the correct time.
• A business, which might ordinarily be a deemed contractor, changing their business model so that construction becomes central to their business, which can affect when they should register as a contractor, what construction expenditure the CIS applies to, and when they can deregister. “A common example is property investment businesses which undertake signifi cant property development activities,” he adds.
• Landlords not recognising that contributions to tenants for construction work can bring them within the scope of CIS. Not identifying when the deemed contractor threshold is exceeded – ongoing monitoring of construction spend is required.
• Not correctly identifying what are contraction operations: “The definition is widely drawn, and the rules state that any mixed contracts must be considered,” Knight says.
• Not applying CIS tax deductions to purported materials and plant hire costs that should have suffered a tax deduction, where they don’t meet the required criteria.
• Not considering employment status, employment intermediaries, and IR35/off -payroll obligations before the CIS: “These take priority over CIS rules, and are frequently targeted by HMRC,” Knight advises.
• Losing gross payment status as a subcontractor. 

“The onus for compliance is mainly on the contractor: mistakes by contractors can be costly as they can be held liable by HMRC for CIS tax under-deducted from payments to subcontractors,” Knight concludes. “If reasonable care was not exercised, HMRC can recover that CIS tax for up to six years from the end of the tax year it relates to, together with interest and penalties.”

CIS COMPLIANCE CONSIDERATIONS

According to BDO’s Matt Harrison, these include:

• Assess whether the business should register for the CIS regime.
• Consider employment status. CIS contractors are required to assess an individual’s employment tax status prior to CIS – this can get complex with IR35.
• Consider your control framework. Does the business gather the necessary information to consider materials deductions? Are employees aware of CIS rules and which services/ supplies fall under the regime?
• Consider whether VAT domestic reverse charge rules apply, and the interaction with CIS.