The Construction Industry Scheme (CIS) was introduced in the 1970s and has continued to evolve since then. The scheme is complex and often misunderstood, making businesses susceptible to the recovery of historical CIS tax, potential penalties, and interest charges where incorrect treatment has been applied.

What is the CIS?

The CIS is a tax-withholding and reporting scheme that applies to payments made from contractors to subcontractors under construction contracts. The scheme is much wider in scope than just construction businesses; it can apply to any business where expenditure on construction operations exceeds the deemed contractor threshold of £3m in a rolling 12-month period, even if construction is not the main business activity.

The CIS interacts with the PAYE system in several ways. For example, CIS deductions suffered by companies are claimed against PAYE via an Employer Payment Summary (EPS), and PAYE compliance failures can result in the loss of a subcontractor’s gross payment status. Therefore, those working in payroll may need to have a working knowledge of the scheme even if they are not responsible for operating CIS.

Why is CIS an area of risk?

The CIS is a tax-neutral scheme if operated correctly from the outset; the only cost is the cost of administering the scheme.

However, where there are failures in compliance, large historic settlements with HMRC can arise, making compliance from the outset crucial.

What are the key complexities of CIS?

The rules are wide in scope, nuanced and regularly change

Being aware of the scope and nuances and keeping up to date with changes is key.

The definition of activities caught by the scheme is very broad and applies to a much wider range of services than just construction. For example, painting and decorating are within scope, as are services which (unless specifically exempted by the legislation) are preparatory or integral to, or for rendering complete, other construction operations.

Another example is traffic management. On 1 March 2025, we will see a change to how CIS applies to traffic management services when provided to contractors in relation to construction operations. In summary:

• From 1 March 2025, traffic management required as part of the safe completion of road works or other construction operations deemed preparatory and/or integral to a construction operation will be subject to the CIS.
• This position supersedes any previous HMRC guidance or rulings.
• Activities such as setting out cones and/or temporary traffic lights, which had previously been outlined as outside the scheme, will now be within the scheme.
• Other activities undertaken ahead of road works commencing, such as road diversions/closures, erection of barriers, temporary road repairs ahead of permanent repairs, will be within the scope of the CIS for the same reason.
• Where the traffic management activity is supplied for a different reason than as part of construction operations (eg barriers to temporarily close roads for a public event), this will be outside the scope of the CIS.
• Where the activity/contract is for the supply and delivery of traffic management equipment to a designated drop-off section only, this will be outside the scope of the CIS.

CIS and VAT are closely connected

The CIS and VAT are now closely connected because of the VAT Domestic Reverse Charge (DRC) for construction services.

For example, in relation to the change to traffic management services, this affects CIS and, in turn, the VAT DRC from 1 March 2025. Many contractors and suppliers of traffic management services may have concluded that traffic management activities fell outside of the DRC previously, so this may need to be reviewed again by both suppliers and purchasers of such services. Where it is concluded that the DRC may apply, consideration should be given to ensuring appropriate processes and procedures are in place to ensure the correct VAT treatment is applied.

There is a complex interaction with off-payroll working rules

The agency rules in Chapter 7 of Part 2 of ITEPA 2003 and the off-payroll working rules in Chapter 10 of Part 2 of ITEPA 2003 take priority over the CIS. It is therefore vital that contractors operating CIS consider these obligations first, along with the obligation to assess the employment status of subcontractors engaged directly as individuals, before considering the CIS.

Our specialists have extensive experience with the CIS and the complexities mentioned above and can help you understand the impact of the scheme. If it would be useful to discuss any of the above, please contact Lee Knight, Susan Ball, or your usual RSM contact.