CIS: Everything you need to know

Background to the construction industry scheme

The history of the construction industry scheme explains a lot about how it works now. In 1945, after the end of the second world war, there was a great deal of building work required in Britain. An itinerant workforce was brought in, but the problem was that once the jobs were complete, the workers returned to their home countries. Thus, HMRC introduced the construction industry scheme (CIS) in 1971.

The primary aim is to combat serious tax evasion in the property and construction sector. Originally, CIS involved paper documents. If you had the right certificates, it meant you could be paid gross. If you did not have the right certificates, you risked suffering a 20% tax deduction. Despite the measures, it never really worked. People abused the system as a way of committing fraud. So, due to the continual problems, there have been many developments to the scheme over the last 50+ years. In 2007, the Revenue decided to overhaul the system – to how we know it now – as an online system.

Types of contractors

CIS involves more than the construction of a building. It can include the land surrounding the building as well as any further construction work required. It is a complicated system that still catches people out, such as property investors.

Some companies encounter issues around deemed contractors versus mainstream contractors. Mainstream contractors are companies whose main trade is construction operations. However, if your company does £3mil worth of construction work across a 12-month period, it becomes a deemed contractor.

Under CIS, contractors must register with HMRC and verify the identity of their subcontractors. Subcontractors do not have to register but contractors must deduct tax at a higher rate from payments. The contractors must provide statements to make the subcontractors aware of this. The deductions count as advance payments towards the subcontractor’s tax and national insurance. Every payment goes through CIS, especially if there is only one mixed contract.

VAT compliance

VAT and CIS has always been in partnership. This evolved further when HMRC brought in the domestic reverse charge (DRC). The 2024 Spring Budget relaxed the CIS rules for landlord-to-tenants payments. Now, most payments made by a landlord to a tenant will be outside the scope of the CIS. An extension to HMRC compliance tests will include VAT returns and payments by the subcontractor.

Employment status

You need to consider the employment status and IR35 regulations when engaging subcontractors. Failure to do will result in fines and penalties. Contractors must state if a subcontractor is self-employed. If a subcontractor has a unique taxpayer reference (UTR), it does not necessarily mean they are self-employed. A UTR merely indicates they are registered for self-assessment. The best way to check the employment status of a subcontractor is with the HMRC check employment status for tax (CEST) tool.

Common mistakes

If you are the person making these decisions in the business – are you confident in your ability? Are you up to speed with the changes in rules? Have you had training, or have you inherited the job from someone who has left?

The ones that make mistakes often do not realise the work they are doing falls under the scope of CIS. For example, when a property investor acquires a new site and converts it. There is a strict requirement to register.

More common mistakes include claiming the cost of equipment that subcontractors already own. For example, scaffolders claiming the cost of scaffolding equipment, or painters using leftover paint from another job. These are not material costs that can go through CIS. Subcontractors might put a mark-up on the materials on their invoice, but the contractor needs to decide what they will tax.

You have to keep your own tax affairs up to date or you risk removal of gross payment status. You do not have the chance to reapply for at least 12 months. That means you suffer 20% tax for at least a year, which will cause cash flow implications if you have still got to pay your own workers. So, both the business and its directors must keep payments up to date for corporation tax, income tax, VAT and their own self-assessment tax returns.

Insolvencies

If HMRC notices your business failing to comply to CIS, they will take action. During the Covid-19 pandemic, there were restrictions on the ability to take action against companies. The Revenue were offering significant time-to-pay arrangements of up to three years. However, HMRC are increasing enforcement.

It’s not surprising that construction business insolvencies were on the rise earlier this year. Compulsory liquidations – where creditors take action against companies – is being driven by HMRC. During the pandemic, they were more accommodating to companies who were late on returns. Now they are making assessments and issuing statuary demands. From that point, the directors of that business have a duty to not erode assets of that company.

This is likely to continue going forward. The Revenue is putting more money into compliance activities, so they have a heavy focus on CIS. Rachel Reeves said she is going to invest in HMRC’s tax non-compliance, as stated by the Chancellor on 29 July.

Further information

To ensure your business is compliant, we offer CIS health checks. Interested? Speak to one of our CIS experts. For any other property-related queries, please contact one of our experts.