13 June 2023
The Construction Industry Scheme (CIS) can apply to construction operations undertaken in the UK and in UK territorial waters. It can apply to:
- construction businesses;
- property developers; and
- (potentially) other businesses and organisations with construction expenditure.
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. It also applies 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, and submitting monthly returns to, HM Revenue & Customs (HMRC). 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 if 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’s on. It can include, but is not limited to:
- preparing sites;
- building work; and
- installing systems for lighting and power.
Does the CIS apply only to UK businesses?
No. CIS applies where the construction work is carried out in the UK or within UK territorial waters, and HMRC treats overseas contractors and subcontractors on these projects as if they were based in the UK.
CIS will therefore need to be considered and applied if a construction project is undertaken in the UK, or offshore but within UK territorial waters (extending 12 nautical miles from the high watermark).
What are contractors and subcontractors?
A firm or organisation carrying on a business that includes construction operations is known as a mainstream contractor. Broadly speaking, this means businesses and organisations whose income comes from undertaking construction work for others, and those who construct new buildings and other 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 subcontract aspects of the construction work to others, and/or 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% CIS tax deduction). A CIS tax deduction of 30% must be applied where a subcontractor has not registered with HMRC.
Does the CIS apply only to construction businesses?
No, the CIS is much wider than that.
Firms and organisations carrying on business that does not include construction operations (ie their business does not normally involve building or construction, such as property investment businesses, restaurant chains, facilities management businesses etc), 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, those businesses and organisations 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 is a HMRC focus area and can be complex. 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.
- Incorrectly applying or missing the VAT Domestic Reverse Charge (DRC) for construction services. The DRC can result in the contractor, rather than the subcontractor, being required to account for the VAT due on supplies they receive for construction operations.
How can RSM help?
RSM can help in a variety of ways to facilitate compliance with CIS and reduce risks in relation to it. For example, we can:
- Help to determine which entities in a 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).
- Undertake CIS risk reviews and support with HMRC CIS enquiries and reviews.
- Disclose, agree, and correct past positions with HMRC where CIS has not been operated correctly.
- Help to consider complex employment status, employment intermediaries, and IR35 obligations before CIS.
- Advise on the correct VAT treatment of construction works.
To discuss ways in which RSM can help, please contact Susan Ball or Lee Knight or your usual RSM contact.