Construction Industry Scheme – the foundations

The Construction Industry Scheme (CIS) has been around in one form or another for over 50 years and it still causes issues for organisations involved in construction operations.

At Crowe, we see many issues involving CIS, from the straightforward involving CIS registrations to the more complex involving whether an activity is caught under CIS. 

For CIS to apply there must be:

• a contract for construction operations
• a contractor and
• a sub-contractor.

Who is a contractor?

A contractor for CIS purposes is either:

• a mainstream contractor whose main trade is to carry out construction operations in the UK and who engage sub-contractors to carry out some, or all the work
• a deemed contractor whose core business is not construction but who have carried out construction work of over £3 million in the preceding 12 months.

Mainstream and deemed contractors are required to submit monthly CIS returns to HMRC and consider amounts of CIS deductions to withhold from payments to subcontractors.

Who is a subcontractor?

Broadly, a subcontractor is contracted for construction operations and is under a duty to the contractor to carry out construction operations. Depending on where an organisation sits in the chain, it can be both a contractor and subcontractor.

Unless a subcontractor holds Gross Payment Status (GPS), they can expect to receive payments after a 20% CIS deduction if they have registered with HMRC for CIS, or 30% if they have not.

When certain conditions are met, we can help subcontractors register with HMRC for GPS so they can receive their payments gross.

What are construction operations?

HMRC describes construction operations as covering “almost anything that is done in the United Kingdom and its territorial waters to a building, structure, civil engineering work or installation, whether of a permanent or temporary nature.”

This is a very wide-ranging definition, and we often see businesses such as those in the retail and hospitality sectors caught by CIS for the construction or refurbishment of property used in their trade.

However, where a deemed contractor undertakes construction operations on a building for its own or a group member’s business, they may be able to immediately de-register from CIS providing certain conditions are met.

Common CIS issues

Deciding if CIS applies to a contract can be complex. For example, should a business that constructs a wind farm costing more than £3 million but whose main trading activity is the supply of electricity to the grid, register CIS? Or, what about a manufacturer who builds a new factory with some letting space available?

Making an incorrect decision can lead to failing to register for CIS, submitting contractor monthly returns to HMRC and withholding CIS deductions from payments to sub-contractors. However, with our help, we ensure our clients avoid these failings.

We also see charitable bodies, who are exempt from registration for CIS, incorrectly extend this exemption to their trading subsidiaries, particularly housing associations. Where this happens, we can help remedy errors and make a voluntary disclosure to HMRC.

Penalties and CIS 

HMRC can apply CIS penalties where a failure to register or operate CIS occurs.

Some penalties are fixed or capped, and others can be mitigated. However, to avoid them, it is best to confirm that you register at the correct time and you keep on top of the compliance issues. The penalties varying from fixed to tax-based amounts can be very expensive if you get things wrong or fail to seek advice in time.

If something has gone wrong, we can help mitigate some or all those penalties.

How we can help

At Crowe, our team of employment tax specialists have supported many businesses and organisations to comply with their CIS obligations and help remedy when things go wrong. We can also help mediate between parties where there is a difference of opinion whether CIS applies to a particular contract.

Using our team’s knowledge and expertise we provide practical advice and solutions to help you stay on track. For further information, contact Glen Huxter or your usual Crowe contact.