The Construction Industry Scheme – overview and changes from 6 April 2024

The Construction Industry Scheme (CIS) can apply to more than just UK construction businesses and property developers. In certain circumstances, it can apply to any business. Awareness of when the scheme applies, and when the rules change, is key to avoiding problems.

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. 

A construction contract is a legally binding agreement, under which one person (the subcontractor) carries out, or provides labour for, construction operations, to another person (the contractor). 

If a single contract includes both construction and non-construction services, then all payments under that contract fall under the CIS, including those for non-construction work. 

The services the CIS applies to are known as ‘construction operations’, which includes a wide range of work done to permanent or temporary buildings, structures, or to the land (such as civil engineering works). For the CIS to apply, the construction operations must be within the UK or UK territorial waters. 

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

How is a contractor defined?

A contractor is a party to a construction contract which is either:

• a business which includes construction operations, such as a construction business or property developer. Otherwise known as mainstream contractors; or
• a business or other body (local authority, housing association etc) that is not a mainstream contractor but whose cumulative VAT exclusive expenditure on construction operations within the previous twelve-month period exceeds £3m. Otherwise known as deemed contractors; or
• a subcontractor who engages other subcontractors to carry out construction work.

A private householder having construction work undertaken on their own home is not a contractor in respect of these works.

The inclusion of deemed contractors means that non-construction businesses and certain other bodies whose expenditure on construction operations exceeds the deemed contractor threshold are within scope of the CIS. 

Contractors have compliance obligations under the CIS. For example, to identify which of their subcontractors are undertaking construction operations, to verify subcontractors, to calculate and deduct CIS tax, submit monthly CIS returns, pay CIS deductions to HMRC, and issue payment and deduction certificates. These obligations all have deadlines, some of which are monthly.

For certain deemed contractors, relaxations to the CIS rules may apply.

Why is compliance important?

For the potential CIS obligations highlighted above, penalties and interest charges can apply where there is non-compliance. 

Contractors may also be held liable for any under-deducted CIS tax from payments to subcontractors. If HMRC determines that reasonable care has not been exercised, they can recover the under-deducted CIS tax for up to six years from the end of the relevant tax year, along with interest charges and penalties. There may be scope under Regulation 9 SI2005/2045 to reduce such settlements with HMRC but this cannot be relied upon and may not reduce the final settlement with HMRC to nil.

How does the CIS interact with the VAT domestic reverse charge for construction and building services?

The VAT domestic reverse charge (DRC) for building and construction services is a mechanism that can shift the responsibility for accounting for VAT from the supplier (subcontractor) to the recipient (contractor) in certain circumstances. 

It applies to supplies of building and construction services that are reported (or should be reported) under the CIS. The services subject to the DRC align with those defined as ‘construction operations’ for CIS purposes, making the DRC and CIS closely interlinked.

Therefore, the CIS cannot be considered in isolation but alongside the VAT DRC.

What has changed from 6 April 2024?

There have been several changes to the CIS rules from 6 April 2024.

1. The compliance tests for subcontractors obtaining and retaining gross payment status (GPS) now include VAT compliance. 
2. HMRC can now cancel GPS immediately if there are reasonable suspicions of fraud involving VAT, Corporation Tax, Income Tax, or PAYE.
3. Telephone GPS applications are no longer available, except for those who are digitally exempt. 
4. The first review of a GPS holder’s compliance history after obtaining GPS will now occur six months after application, followed by subsequent reviews at twelve-month intervals.
5. The rules regarding payments from landlords to tenants have changed (see below). 

The wide scope of the CIS means it can extend to landlords making payments to tenants for construction operations.

Payments from landlords to tenants solely for ‘Category B’ tenant fit-out works provided as an inducement have historically been exempted from CIS as reverse premiums. However, any other payments for construction operations from landlords to tenants (such as payments for ‘Category A’ landlord works) were subject to CIS, potentially causing CIS complications for both the landlord and the tenant.

To help address these complications, a new regulation (Regulation 20A SI2005/2045) was introduced from 6 April 2024. This regulation exempts a wider range of payments from landlords to tenants from the CIS, provided all the following conditions are met:

• the payment is made by or on behalf of the landlord;
• the person receiving the payment is a tenant (including subtenants in case of subletting) or prospective tenant of the landlord;
• the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease;
• the tenant that occupies or will occupy the property will carry out the construction operations themselves, or a third person will carry out the construction operations pursuant to a contract with the tenant; and
• the payment is for construction operations relating to works intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease.

Conclusion

The CIS can be complex and is a focus area for HMRC who check compliance with the scheme. There are several traps and pitfalls for the unwary and mistakes can be costly for both contractors and subcontractors. Awareness of the complexities and having robust procedures to facilitate compliance is crucial to avoid problems and potential settlements with HMRC.

For more information on the CIS, including the issues discussed above, please contact Lee Knight, Susan Ball, or your usual RSM contact.