TT112: Construction Industry Scheme Update
Why is there a Construction Industry Scheme?
From 6 April 2007 a new Construction Industry Scheme (CIS) has operated. Whilst it is not ‘new’ any more, the rules are worth revisiting for pitfalls.
Essentially, the rules exist to allow HM Revenue & Customs (HMRC) to capture all data on persons/businesses working and paid in the construction industry. This allows HMRC to ensure that no income in this industry slips through the taxation net. Stiff penalties for Contractors apply for late or missing monthly returns.
This issue of Topical Tips does not deal with the scheme in detail, but reviews the definition of Contractor to ensure clients are aware if they are obliged to register.
The definitions of Contractor and Sub-Contractor are sometimes a surprise to people who fall within the scheme. For example, someone who buys land or property and builds upon it or refurbishes it for sale, will be required to register as a Contractor under CIS, even though they may be only operating on a small scale.
Definition of Contractor:
- A Contractor is a business (or other concern) that pays Sub-Contractors for construction work.
- Contractors are often construction companies or building firms, but may also include other non-construction businesses (e.g. large retailers, government departments, etc.) if their average annual expenditure on construction operations over three years exceeds £1M.
- Contractors can either carry out construction work or supply labour for such work (this includes labour agencies).
- The same rules apply to foreign businesses operating in the UK.
- The definition includes property developers or speculative builders erecting or altering buildings in order to make a profit.
- There is no minimum threshold level of expenditure before you are expected to register and operate the scheme.
Note that a property investor is not the same as a property developer and the investor may not be caught under the rules. However, if the property portfolio is substantial enough then it may break the £1M threshold on works on construction operations and will become a Contractor by definition. You should be careful to check your position if you wish to rely on this exemption from the CIS.
If you are caught by the rules then you are obliged to ensure you have confirmed the taxation status of all persons working for you who are also caught under the CIS and report on a monthly basis the payments made to them. The status of the Sub-Contractor will tell you whether you can pay them gross, or have to deduct tax at either 20% or 30% on all labour elements paid to them. All persons you pay for construction operations need to be registered with HMRC or else they will suffer the maximum tax withheld of 30%.
Barnes Roffe Topical Tips:
- Non-construction businesses spending below £1M pa on construction operations, and private households engaging builders directly, are not Contractors.
- Construction Operations are extremely diverse and can catch many modern technologies if they are supplied and installed during construction activity.
- Know the rules: some areas are automatically included, whilst others are excluded from construction operations. See the HMRC booklet CIS340 for assistance.
- Be aware that repairs are included in Construction Operations (unless you are specifically exempted, for instance you are working on a private household).
- See also http://www.hmrc.gov.uk/cis/index.htm for extensive HMRC guidance.
- The test of employment v. self-employment must be used when engaging a Sub-Contractor – even when they are CIS registered and are engaged on more than one project.
- PAYE and NIC rules take precedence over CIS rules and if the person counts as an employee then they are taxable as such regardless of their CIS status.