Susan Perry discusses the tax implications of payments to contractors and sub-contractors.
Designed to stop the Government losing tax income due to the prevalence of cash-in-hand payments by construction businesses, the Construction Industry Scheme places a heavy administrative burden on contractors, or those deemed by the scheme to be contractors. Getting it wrong might delay a corporate property sale as well as resulting in fines and penalties. Businesses need to understand whether it applies to them and get the necessary help in administering it.
What is it?
The Construction Industry Scheme (‘the CIS’) despite the title, is not a construction law issue but a tax one. Despite its far reaching consequences, many developers are simply unaware that the CIS applies to them.
In simple terms, if a payment is made to a sub-contractor under a construction contract their CIS status has to be checked first, using the HM Revenue & Customs (‘HMRC’) verification process. If the subcontractor is registered for the CIS then HMRC will inform the contractor whether the payment can be made gross or whether there needs to be a deduction, which will be 20%. Whether or not there will be a deduction depends on how much HMRC trust that sub-contractor to pay them the tax (or, as they put it, whether the sub-contractor can demonstrate that they are “tax compliant”).
If a sub-contractor isn’t registered at all, then a deduction of 30% must to be made from the payment. Deductions are then paid over to HMRC and there are monthly filing requirements to HMRC during the course of construction and an obligation to inform HMRC when the business stops using subcontractors (even if only temporarily, for example, because the business is using its own employees to carry out work).
Does the CIS apply?
The CIS applies to all contractors and subcontractors, whether sole traders, partnerships, or companies working within the construction industry. Any given development project will involve parties who for the purpose of the CIS are contractors, sub-contractors and it may involve some who are both.
In addition, many non-construction businesses or organisations must also comply with the CIS. These include property developers, local authorities, and housing associations which have a construction spend of an average of £1 million or more in any three-year period (or £3 million or more in a shorter period); these are ‘deemed contractors’. There is a broad definition to catch non-construction businesses and we can advise on whether this applies.
The CIS applies to all payments made by a contractor to a subcontractor under a construction contract, but does not apply to payments to employees.
The CIS may also apply where there is a short term, high spend on construction operations which results in a company or business being a “deemed contractor” within the scheme, or where a property is being acquired through a corporate sale and previous high value construction work has taken place. In some cases, this could affect a private housebuilder if the property is owned through a corporate vehicle. If in doubt, ask.
Are there any exceptions?
There are a range of exceptions, the main one being for businesses who pay for construction work on a property that they (or another group company) use themselves. This exception does not include property which is let commercially to others, which is for sale or is held as an investment.
What steps should be taken?
Many developers and contractors will already be aware of the CIS and operate it as a matter of course but others may not realise that as well as applying to the contractors they employ, it also applies to them as they are covered by the definition of a “contractor” under the CIS.