Many people think that the Construction Industry Scheme (CIS) only applies to construction companies and building firms. Not so: the CIS can apply to businesses not in the construction industry and this often causes problems. In this article we will look at what the CIS is, who it applies to and how to avoid it or mitigate the implications of it.
What is the CIS?
The CIS arose from HM Revenue & Customs’ (HMRC) distrust of sub-contractors’ willingness to pay tax on sums they received for work undertaken. The CIS is a tax collection system that requires a contractor – the person who has commissioned the works – to withhold tax from any payment to the sub-contractor – the person undertaking the works – unless the sub-contractor is entitled to be paid gross. The contractor has to account directly to HMRC for the tax withheld, at either 20% or 30%. This saves HMRC from having to pursue the relevant sub-contractor for the tax at a later date.
The CIS is mandatory and where applicable it must be operated correctly, otherwise penalties could be payable and other sanctions imposed.
Sub-contractors who have received payments net of tax can set off these deductions against sums payable by them to HMRC, such as employers’ and employees’ national insurance contributions and PAYE due from the company’s employees. Such withholding can however create cashflow costs (see box).
Who does the CIS apply to?
As expected, the CIS applies to those in the construction industry. However, it can also apply to any other business whose average annual expenditure on construction operations over a period of three years is £1m or more. Where the relevant business has not been carried on for three years, if one-third of its expenditure on construction operations incurred during the business’ life exceeds £1m then the CIS will apply to it.
“Construction operations” is very widely defined and covers not just construction, alteration and demolition of buildings; it can also include:
? internal cleaning of buildings if carried out in the course of construction;
? painting or decorating the internal or external surfaces of buildings; and
? installation of power supplies or fire protection.
Therefore, the CIS could apply to a property investor whose main business is acquiring property to let, if such investor has spent sizeable sums refurbishing its properties over the past few years. In these circumstances, it is not just the property investor who is affected by the CIS but also the sub-contractor. If the sub-contractor is, say, a tenant that has agreed to undertake landlord’s works together with its own fit-out, there could be cashflow implications for the unsuspecting tenant if it is not registered under the CIS – which will more often than not be the case.
Typically, inducement payments, such as a landlord’s contributions towards the cost of a tenant’s fit-out works on the grant of a new lease, are not caught by the CIS. However, the CIS could apply where a landlord makes a contribution towards the cost of the tenant’s fit-out works and such contribution is rentalised.
Can I avoid the CIS?
As a contractor, if your spend on construction operations is above the stated limits, the CIS will apply to sums paid by you for those operations. Therefore, you will need to register with HMRC as a contractor and operate the scheme accordingly. Registration is a relatively simple process and can be completed over the phone.
As a sub-contractor, if the CIS applies to payments to you, consideration could be given to the following:
? Registering with HMRC as a sub-contractor entitled to be paid gross for construction works undertaken by you – this can, however, take several months.
? Registering as a sub-contractor with HMRC as one entitled to be paid subject to deduction of tax, which will limit any deductions to 20%, as opposed to 30%.
? If you are a prospective tenant and the CIS will apply to a payment by your landlord to you, such as for landlord’s works, asking the landlord to engage a third party that is entitled to be paid gross to undertake the necessary works.
? If you are a prospective tenant and an inducement payment is being paid to you that will be caught by the CIS, altering the form of inducement so that the CIS does not apply to it – for example, by taking a rent-free period instead of a cash payment. Whether this meets with your commercial needs will, however, need to be considered.
The CIS can often catch the unwary and should always be considered at the earliest opportunity when construction operations are being undertaken.
Alex Barnes is a tax partner at Irwin Mitchell
