The UK Construction Industry Scheme (CIS)

Brief Outline

The CIS was introduced to counter perceived tax evasion in the construction industry and certain other businesses.

It imposes an obligation on a contractor (as defined) to deduct amounts on account of tax from payments made by it to a subcontractor and to account for those deductions to HM Revenue & Customs (HMRC). The amounts deducted are treated by HMRC as advance payments towards the subcontractor’s tax and National Insurance contributions.

Contractors must register for the scheme. Subcontractors are not obliged to register, but deductions are taken from their payments at a higher rate (30 per cent rather than 20 per cent, or 0 per cent) if they are not registered.

“Mainstream” and “deemed” contractors

Under the CIS, the word "contractor" encompasses both businesses which undertake construction as a core activity, such as property developers, building and construction businesses, utilities, telecommunications, transport network and infrastructure companies (referred to as “mainstream contractors”) and also businesses which do not undertake construction operations but whose spend on construction operations meets certain thresholds (“deemed contractors”), perhaps a property investor who undertakes certain refurbishment works.   

A business will be a “deemed contractor” if its expenditure on construction operations in the UK in the previous rolling 12-month period exceeds £3 million. “Construction operations” extend beyond building structures and include activity such as site preparation, erecting scaffolding, installing heating and lighting systems and painting and decorating. 

Once classified as a “deemed contractor”, a business must remain registered for the CIS until it has satisfied HMRC that its expenditure on construction operations in the UK has been less than £3 million in the previous rolling 12-month period.

Examples of “deemed contractors” could include property investors, retailers and banks which undertake property refurbishment works. Businesses should keep an accurate record of the date and amount of construction spend in order to clearly identify when they become (or cease to be) contractors under the CIS.

“Subcontractors”

A subcontractor is a business which carries out construction work for a contractor or provides staff to do that work or subcontracts it to another person. This wide definition means that it may include project managers or engineers where they are not simply acting as consultants but are involved in the execution and management of the construction work.

The contractor’s obligations under CIS

Deductions. The rate of tax that must be deducted by a contractor depends on the subcontractor’s status. The contractor is obliged to check this status with HMRC before any payments to the subcontractor are made. Once that initial verification has been made, the contractor can rely on it for future payments unless/until HMRC notifies it of a change to the subcontractor’s status.

Unless HMRC confirm that the subcontractor is registered to receive payments gross, the contractor must deduct tax from payments to the subcontractor (excluding the cost of materials and VAT): 

• At 30 per cent if the subcontractor is not registered; and
• At 20 per cent if the subcontractor is registered (without gross payment status).

Where a subcontractor has satisfied HMRC that it meets certain criteria for gross payment (relating to turnover levels and tax compliance), the contractor can make payments without any tax deduction.

Deduction statements and monthly returns. Contractors must provide subcontractors with a payment and deduction statement setting out the deductions made under the CIS on account of tax.  

Contractors must also submit monthly returns to HMRC setting out all payments made to subcontractors under the CIS in the preceding month. Where no relevant payments have been made that month contractors must inform HMRC that no return is due.

A number of penalties may be imposed for failure to comply with CIS. It is also possible for a contractor which has a CIS gross payment registration in respect of payments made to it in its capacity as a subcontractor, to lose that status if it fails to comply with its contractor obligations under the regime.

Landlord and tenant contributions

Currently, certain contributions paid by a landlord to a tenant for a tenant to undertake works could fall within the CIS, where the landlord is a contractor.  In a welcome move, the Autumn Statement 2023 confirmed that certain contributions between landlords and tenants will be taken outside the scope of CIS, expected to take effect from 1 April 2024.

The VAT “reverse charge on construction services”

Since 1 March 2021, the construction sector has been subject to a domestic VAT “reverse charge”. The reverse charge was brought in to combat VAT avoidance in the construction industry by shifting the obligation to account to HMRC for VAT from the supplier of construction services to the recipient of the supply.

The definition of “construction services” is closely aligned with that of “construction operations” in the context of CIS. It is therefore important for a supplier of services within the scope of CIS to consider whether its supplies will also be subject to the VAT reverse charge, or whether an exception applies (such as “end user” or “intermediary”).

The “end user” exception will usually be applicable in a landlord and tenant relationship, provided that the tenant gives written notice to the landlord that the conditions for the exception are satisfied no later than the time of the supply.