The Construction Industry Scheme (CIS) regime was introduced under the Finance Act 2004 to regulate tax on payments between contractors and subcontractors for construction work.
The regime requires subcontractors to be registered with HMRC in order to receive payments gross (i.e. without deduction of tax). If subcontractors are not registered, contractors are then obliged to make payments net of tax and to account directly to HMRC for the tax due. The point to be aware of is that it is a contractor’s responsibility to check whether a subcontractor is entitled to be paid gross or not.
For CIS purposes, the term “contractor” does not just capture mainstream construction contractors, but also includes any business which spends on average £1 million or more per year on construction operations over a three-year period (so-called “deemed contractors”). Many organisations caught by that definition are more commonly thought of as “clients”, and therefore the CIS scheme covers parties for which construction is not “business as usual”.
Managing CIS obligations correctly is essential, not least because:
- contractors are directly liable to HMRC for unpaid tax liabilities if they make gross payments to subcontractors where there was no entitlement;
- contractors can also be liable for fines for failure to correctly follow the scheme; and
- as a subcontractor, failure by you or the contractor to comply with CIS obligations can negatively affect cash flow if deductions are made unnecessarily.
These basic principles might be relatively well established; however, set out below are a few less well known points which it is important to be aware of:
- If a contract relates to both construction and non-construction operations then all payments under that contract will be subject to CIS. The term “construction operations” is defined in detail in the 2004 Act but the meaning is very broad. Professional work (e.g. architect services) is not included however. Deductions do not need to be applied to the cost of materials, nor to plant hired from third parties, but charges for plant and equipment owned by a subcontractor are subject to CIS.
- CIS does not apply to a business carrying out work on its own premises (e.g. refurbishment of its head office) even if the value of the works would otherwise exceed the “deemed contractor” threshold. However, note that this is only the case where the property is specifically used as part of the operation of that business. If the property is let to a third party, being sold or held as an investment, then CIS will apply.
- Whilst CIS does not apply to projects outside the UK, it does apply to non-UK businesses carrying out construction work in the UK. Subject to certain limited exceptions, those businesses must still register and apply CIS principles. If a company is based in a territory which benefits from a Double Taxation Agreement, it must still operate CIS but may be entitled to repayment of any deductions made.
- Once a company is considered a “contractor” for CIS purposes then it must continue to make monthly returns to HMRC even if no further payments are being made. If a “contractor” knows it won’t be making any payments for some time it can inform HMRC and become “inactive” for six months, avoiding the need to make nil returns; potentially useful for SPVs.
- When calculating the amount from which CIS tax will be deducted, contra charges are disregarded and deductions are applied to the full sum. However, if money is withheld by way of set-off then this does reduce the amount which is subject to the CIS deduction. This can be important if a pay less notice has been issued, as the reason for the deduction will affect the CIS deductions due.
- Contractors do not need to verify subcontractors within the same group of companies if another group company did so within the past two years. However, the same does not apply to joint venture companies, who must always verify their joint venture partners as subcontractors if payments are being made between them.