The Construction Industry Scheme (CIS) applies to all payments made under a 'construction contract' – a contract relating to, or which includes, 'construction operations'. For the purposes of the scheme, the person making the payment is termed a 'contractor' and the person receiving it a 'subcontractor'.
Contractors under the scheme fall into two groups:
- mainstream contractors: construction businesses such as builders and property developers
- deemed contractors: certain public bodies, as well as non-construction businesses which have spent on average £1 million or more a year on; construction operations’ for the last three accounting periods.
Once an organisation becomes a deemed contractor, it will stay one until it can show HMRC that its spending on construction operations was less than £1 million a year for three years in a row. If HMRC is satisfied that this is the case, it will de-register it as a deemed contractor.
The CIS regime applies to all payments made under a construction contract. This means that even if the contract covers matters other than construction operations, the whole contract and payments made under it are subject to the scheme.
What are 'construction operations'?
Construction operations are defined in the legislation as essentially any work in the construction, alternation, repair or demolition of buildings or structures. However, they also include the installation of key systems in buildings, such as heating, lighting, air conditioning and similar. Finally, the interior and exterior decoration of buildings and cleaning, when carried out in the course of repair, alteration or construction, are within the definition. Geographically, the scheme is limited to work carried out in the UK or its territorial waters. More about the types of work that are covered by the scheme in HMRC's Construction Industry booklet CIS340.
What is a construction business?
The legislation is not particularly clear. The term 'carrying on a business which includes construction operations' does not have a de minimis limit associated with it. Therefore, if your business or organisation includes even a small amount of construction operations, then you should consider whether you need to register under the scheme.
The term is intended to catch the mainstream building trade and some others. The HMRC manuals indicate that the term 'mainstream contractor' should be interpreted as follows:
"Property developers are included within the meaning of mainstream contractors because their principal business activity is the creation of buildings or other civil engineering works. The same is true of a speculative builder."
However, it is important to note that a 'property investment business' is not the same as a 'property developer'. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental. It does not need to be involved in the construction of buildings. Even so, if its property estate is substantial enough, its expenditure on building repairs may well cause it to fall within the meaning of 'deemed contractor'." (HMRC CISR12080)
What is a deemed contractor?
The term 'deemed contractor' is the area where other organisations may be affected by the scheme and need to register.
The first type of deemed contractor includes local authorities, NHS trusts and other similar public bodies. The full list of which types of bodies are included within the definition is in Section 59, Finance Act 2004. However, if one of these bodies sets up its own direct labour organisation as a separate company, it will need to register with HMRC. If any public body is privatised, they will also have to apply under the normal rules.
The second type of deemed contractor is any organisation which spends the requisite amount on construction work as detailed above, unless of course it is exempt.
Are there any exemptions from the scheme?
- An organisation that might otherwise be a deemed contractor can apply to be exempt if they only carry out ‘self build’ construction operations, which is to say on property used by them (or another group member) for the purposes of a business carried on by them (under Regulation 22, SI 2005 No 2045).
- Charities do not have to apply the CIS to payments they make for construction work (Regulation 24). But this does not apply to their trading subsidiaries.
- The CIS rules do not apply to payments for construction work made by the headteachers and governing bodies of maintained and voluntary aided schools on behalf of the local authority.
For additional information, see HMRC guidance
What is the effect of CIS applying?
CIS requires the contractor to verify the subcontractor with HMRC before payment is made. There are then three possible scenarios:
- the subcontractor is registered to receive gross payments, in which case the contractor will not deduct any amounts from the payments at all
- the subcontractor is registered with HMRC, but does not qualify to receive gross payments, in which case the contractor must deduct tax at a rate of 20% from payments (excluding VAT and materials), and pay this over monthly to the HMRC Accounts Office
- the subcontractor is not registered with HMRC, in which case the contractor must deduct tax as above, but at a rate of 30%, not 20%.
What obligations does the contractor have?
Further information on contractor registration and obligations
- The contractor must register with HMRC.
- As CIS does not apply to employees and only applies to self-employed workers, the contractor must check that any individuals and sole traders it is paying are not its employees. HMRC's website features an employment status indicator which can be useful.
- The contractor needs to verify the status of the subcontractor before making payments under the construction contract.
- The contractor must be satisfied that any deduction for the direct cost of materials is reasonable.
- Depending on the subcontractor’s status, tax may have to be deducted and paid to HMRC’s Accounts Office.
- The contractor must give a written statement to each subcontractor from whose payments it makes a deduction.
- The contractor must keep records.
- A contractor must make monthly returns to HMRC of all payments made to subcontractors in the tax month.
can be found on HMRC's website.