Don’t be caught out by the Construction Industry Scheme – it could cost you!
Construction and Commercial Property solicitor Ben Cox explains how property owners can find themselves in breach of the Construction Industry Scheme (CIS) if they don’t keep track of their expenditure on construction work and services. He also reminds employers that they can be deemed as ‘contractors’ too and therefore bound to comply with the CIS payments scheme
Let’s take a look at the scheme in more detail:
The CIS is a tax deduction scheme intended to reduce tax avoidance by subcontractors, by obliging their employers to deduct tax from payments made to them or to ensure that the subcontractor is registered under the CIS and entitled to receive payments in gross.
In essence (and a little over-simplified) those involved in construction projects must register as a contractor under the CIS if they either:
- Contract to carry out building work for someone (even if they subcontract that work);
- Spend an average of £1m per year on procuring construction work in any 3-year period ending with the last period of accounts.
It is this second limb that can easily, and sometimes unwittingly, result in larger businesses which are not themselves builders, becoming bound to register under and comply with the CIS.
There are some exceptions. For example, where the employer is a private householder, a charity, or some types of school or, in certain circumstances, where the employer is instructing work to property that they use for their own business.
Be aware that, if you are deemed to be a contractor by the CIS, you must register under the Scheme before taking on and paying your first “subcontractor” to carry out construction works. The term subcontractor confusingly includes the main contractor (your builder), if you, as an employer, are deemed to be a contractor under the CIS.
Failure to comply with the CIS can lead to fines for directors as well as the company itself.
What construction work does the CIS cover?
CIS covers the majority of construction work in the UK to a building or structure and civil engineering works, such as roads and bridges.
Construction work under the CIS includes the following, subject to some specific exclusions that we won’t go into here:
- Site preparation and foundations;
- Demolition and dismantling;
- Building works;
- Installing heating, lighting, power, water and ventilation systems;
- Alterations, repairs and decorating; and
- Cleaning the inside of buildings after completion of construction work.
Don’t forget: Demolition and even decoration count as “construction” and so must be included in any calculation of the £1m per annum over three years threshold.
What contracts count as construction contracts?
As well as building contracts for the carrying out of the operations mentioned above, appointments of professionals can be treated as construction contracts, if the professional is involved in the management or carrying out of the construction work.
Top Tip: If a contract covers both construction operations and other work, goods or services then the Revenue will treat all payments under that contract as governed by the CIS. In those circumstances, it is worth considering having separate contracts – one for the construction operations and one for the rest.
Keep records and take advice
Keep a record of how much you pay and when for “construction” work. Check back over previous years in case you might be about to exceed the threshold of £1m spend per annum over the last three consecutive periods of account. Slightly different rules apply if your business was set up within the last three years.
If you are or might soon be deemed a “contractor” under the CIS, discuss with your project manager and accountants without delay. You will need their help to comply with the CIS. There is a lot of admin to deal with, including verifying subcontractors’ registrations under the CIS, making deductions from payments (where required), issuing statements to subcontractors and making monthly returns to the Revenue.
We’re here: If you would like further information, please get in touch with Ben Cox at firstname.lastname@example.org and 07970 689848 or Andrew Harbourne, Partner, at email@example.com and 07967 776896.