Refresher: The Construction Industry Scheme (CIS) as HMRC mounts pressure

With HMRC issuing ‘one to many’ letters to businesses, including those who aren’t even within the construction industry, organisations need to be aware of their obligations under the Construction Industry Scheme (CIS). 

The CIS is a withholding / anti-avoidance scheme that was originally introduced in 1971 to tackle perceived tax avoidance in the construction industry.

However, it is very broad in reach and could apply to any business that engages with another party (a ‘subcontractor’) to undertake construction operations in the UK (including UK territorial waters). The scope of ‘construction operations’ defined at s74 Finance Act 2004 includes:

“construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations”

Any company who ‘carries on a business which includes construction operations’ (i.e. their main business activity is construction) is a mainstream contractor.

Any company who is not caught by the mainstream contractor rules but spends in excess of £3m on construction operations in any rolling one-year period is considered to be a deemed contractor.

Mainstream and deemed contractors must comply with their obligations under the CIS by registering with HMRC, withholding CIS on subcontractor payments (where required), and filing monthly returns with HMRC to report payments, as required.

A commercial landlord rents out several properties and over the course of the year spends £2.5m renovating two properties to make them fit for occupation by new tenants. In addition, they spend £600k in day-to-day repairs to the rest of the rental portfolio.

Whilst, in the first instance, a commercial landlord is not a mainstream contractor, as they have spent in excess of £3m in a one-year period, they will be considered a deemed contractor and must operate the CIS on all payments once the £3m threshold has been passed.

A key consideration for real estate businesses is whether they will be considered a mainstream or deemed contractor by HMRC, which depends on whether they are seen to be developers or investment businesses. Property investors are not considered mainstream contractors, but property developers are, and as such are required to register and operate CIS as soon as they engage subcontractors to carry out construction work.

There is limited HMRC guidance on how to distinguish between businesses that they see as ‘property developers’ and those they view as ‘property investors’. However, where works consist of the creation of new buildings, or the significant renovation or conversion of existing buildings or land (e.g. converting commercial property to residential flats), this activity will generally fall within development.

A ‘property investment business’ is not the same as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental. If a property investment business simply purchases a property as an investment asset to hold for rent and undertakes minor refurbishment work before being ready for occupation, these activities should not be considered those of a mainstream contractor.

Furthermore, HMRC have been targeting insurance businesses to remind them of the CIS obligations that exist, as they believe that compliance failures are occurring in this industry. 

In cases where an insurer engages with a subcontractor (for example a loss adjustor), to undertake construction works on a policyholder’s property, this could be caught by the CIS, resulting in an obligation to register as a contractor under the CIS. 

• If you have received a ‘nudge’ letter from HMRC, you should take action now to consider whether any activity falls within the CIS. We recommend that all such correspondence from HMRC is responded to promptly, even if you believe that your business has no existing CIS obligations.
• Given the potential penalties for non-compliance, if you have undertaken any construction activity (e.g. repairs and maintenance) and have not considered the CIS, now is the time to do so.
• For those businesses that may fall into the deemed contractor category, you should ensure that there is a monitoring process in place so that registration can take place proactively at the point required. 

If you would like to discuss the CIS, please reach out to Oliver Bull or your usual Evelyn Partners contact.

Approval code: NTAJ140824121