Traffic management - could the construction industry scheme apply?

The construction industry scheme (CIS) was introduced in 1971, but it is regularly evolving, and many businesses are still being caught out due to a lack of awareness of the nuances of the scheme, putting them at risk of under deducting CIS tax, resulting in penalties, and interest charges becoming payable to HMRC. A recent change in HMRC guidance on traffic management services demonstrates the complexities perfectly.

Does the construction industry scheme only apply to construction businesses and property developers?

The scope of the CIS is broad and impacts a wide range of businesses. The inclusion of deemed contractors means that non-construction businesses and certain other bodies whose VAT-exclusive expenditure on construction operations exceeds £3m within the previous rolling 12-month period are within the scope of the CIS. Many different types of business outside of the mainstream construction industry are required to comply with the scheme, including property investors, dredging businesses, utility companies, leisure and hospitality businesses, and those building infrastructure networks.

Deemed contractors may have to operate the CIS immediately after the threshold is exceeded, and before the next contract payment is made, and so a continuous monitoring of construction expenditure against the threshold is required.

What type of work is within the scope of CIS?

Work falling within the definition of construction operations is caught by the CIS. This includes a wide range of work done to permanent or temporary buildings, structures, or land.

For some activities it is obvious that they fall within this definition. However, there are certain works that one might not immediately think are in scope, but which are. Works which (unless specifically exempted by the legislation) are preparatory to, integral to, or for the purposes of rendering complete construction operations are caught, which brings in a wide variety of services. A notable example of this is traffic management. HMRC has issued new guidance, stating that from 1 March 2025 traffic management services will be within the scope of the CIS when supplied to a contractor conducting construction operations, because the services are preparatory or integral to those construction operations.

Is this a change or a clarification?

Prior to the new guidance the CIS status of traffic management has not been clear, and it is possible that the CIS treatment applied by different contractors and suppliers has varied, sometimes based on differing rulings provided by HMRC. HMRC has said that the new CIS guidance will supersede any previous guidance or rulings given by HMRC on traffic management activities. A number of important points should be noted.

• All traffic management work required for the safe completion of road works and other construction operations will be deemed both preparatory and integral to those operations, and thus, subject to the CIS, from 1 March 2025. This includes activities required before construction operations commence, such as temporary white lining, or temporary road repairs ahead of permanent repairs.
• Previously, temporary traffic lights and the setting down of cones were specifically noted as outside the scope of the CIS, they will now be within the scheme when provided to a contractor undertaking construction operations.
• Where a contract is for the supply and delivery of traffic management equipment to a designated drop-off point only, without (for example) placement into position, it will remain outside the scope of the CIS.
• When supplied for a different reason, for example barriers provided to the organiser of a large public event, traffic management services will be outside the scope of the CIS.

What should businesses and other organisations do?

Contractors that enter contracts with suppliers of traffic management services will need to ensure they operate the CIS in relation to such supplies which are caught from 1 March 2025.

Businesses and other organisations that are not mainstream contractors will, from 1 March 2025, need to ensure they include the VAT-exclusive cost of traffic management services when considering whether their expenditure on construction operations exceeds the £3m threshold on a rolling 12-month basis.

Businesses providing traffic management services to contractors undertaking construction operations will need to register as a CIS subcontractor if they are not already registered, otherwise they may suffer a 30% CIS tax deduction. Registered CIS subcontractors are subject to a lower rate of CIS tax and subcontractors can also apply for gross payment status, which may be beneficial for cash-flow and other commercial reasons.

What about VAT?

The VAT domestic reverse charge (DRC) for construction will also need to be considered in respect of such traffic management services 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 looked at again by both suppliers and purchasers of such services. Where it is concluded that the DRC may apply, consideration should be given to making sure appropriate processes and procedures are in place to ensure the correct VAT treatment is applied.

For more information, please contact Lee Knight, Susan Ball, or your usual RSM contact.