The Construction Industry Scheme (CIS) applies to construction operations, including those of windfarms and related infrastructure in the UK and UK territorial waters. What practical steps can you take to avoid costly non-compliance?

What is the Construction Industry Scheme?

CIS is a tax reporting and tax deduction scheme that applies to contracts between contractors and subcontractors for construction operations, and to payments made by contractors to subcontractors under such contracts.

Where a CIS tax deduction is required, the contractor must withhold that tax at the point of payment to the subcontractor. CIS places other obligations on the contractor, too, including registering with HM Revenue & Customs (HMRC) and submitting monthly returns to it. CIS can also affect the subcontractor’s cash flow position.

The contractor can be held responsible for under-deducted CIS tax in cases of non-compliance. Settlements with HMRC can be significant when large payments are incorrectly made without a CIS tax deduction, and HMRC may also charge penalties and interest. Mistakes can therefore be expensive, so compliance is key.

What are ‘construction operations’?

The definition of ‘construction operations’ is wide. It covers most construction work to a permanent or temporary building or structure, or to the land. It can include (but is not limited to):

• preparing sites;
• dismantling;
• building work; and
• installing systems for lighting and power.

Wind farm construction therefore falls within the definition of ‘construction operations,’ and so is caught by CIS.

Does CIS apply only to UK businesses?

No. CIS applies where the construction work is carried out in the UK or within UK territorial waters. HMRC treats overseas contractors and subcontractors in the same way as if they were based in the UK. If a wind farm is constructed in the UK, or within UK territorial waters (extending 12 nautical miles from the high watermark), CIS will need to be considered and applied.

What are contractors and subcontractors?
A mainstream contractor is defined as a person carrying on a business that includes construction operations. This means businesses whose income comes from undertaking construction work for others, and also those who construct new buildings and structures.

A subcontractor is the party to the contract who is under a duty to the contractor to carry out the construction operations, and/or to provide their own labour or the labour of others for carrying it out.

Subcontractors may also be contractors when they provide other people’s labour instead of, or in addition to, their own.

Subcontractors can be registered for gross payment status (no CIS tax deduction required) or net payment status (20 per cent CIS tax deduction). A CIS tax deduction of 30 per cent must be applied where a subcontractor has not registered with HMRC.

Does CIS apply only to construction businesses?
No, CIS is much wider than that. Businesses whose trade does not normally involve building or construction, but whose annual expenditure on construction operations nonetheless exceeds a threshold, are referred to as ‘deemed contractors.’ Deemed contractors may have to operate CIS immediately after the threshold is exceeded or is expected to be exceeded.

From 6 April 2021, businesses will reach the deemed contractor threshold when they have spent more than £3m on construction operations in the previous 12 months.

Common pitfalls and problems for contractors

CIS can be complex and there are a number of traps and pitfalls for the unwary. These can include (but are not limited to):

• Not registering for and applying CIS at the correct time.
• Not identifying when the deemed contractor threshold is exceeded (ongoing monitoring of construction spend is required).
• Missing that a subcontractor is performing construction operations (the definition of construction operations is widely drawn).
• Not applying the correct CIS tax deduction rate (robust procedures relating to the verification of subcontractors are important).
• Not applying CIS tax deductions to purported materials and plant hire costs that should have suffered a tax deduction.
• Not considering employment status, employment intermediaries, and ‘IR35’ obligations before CIS – these rules take priority over CIS, and are contentious areas frequently targeted by HMRC.

How can RSM help?

RSM can help in a variety of ways that ensure your compliance with CIS and reduce your risks in relation to it. For example, we can:

• Help you to determine whether you and other entities in your group structure need to register for and operate CIS.
• Deal with contractor and subcontractor registrations (including subcontractor applications for gross payment status and registrations for overseas businesses).
• Analyse suppliers to determine which are providing services within the scope of construction operations.
• Review supplier/subcontractor invoices to determine how CIS tax should be deducted.
• Deal with ongoing CIS compliance (verifying subcontractors, monthly returns, payment and deduction statements etc).
• Help you to consider complex employment status, employment intermediaries, and ‘IR35’ obligations before CIS.

To discuss ways in which RSM can help, please contact Susan Ball or Lee Knight or your usual RSM contact.