Construction Industry Tax: Where are we now?
A Construction Industry Scheme (CIS) tax contractor has a lot of tax responsibilities. These include:
verifying new subcontractors, when the contractor first uses them;
deducting CIS tax, where appropriate, from net registered subcontractors and deducting the tax from the correct items;
producing statements for net payments to subcontractors;
completing and submitting monthly contractor CIS tax returns;
deciding what is, and what is not construction operations.
Back to Basics
It must be appreciated that the construction industry tax regime, with all the responsibilities placed upon the contractor, only applies where…
A contractor engages a subcontractor, to carry out qualifying construction operations, as defined in Finance Act 2004, s. 74. All three elements must be present, for CIS to apply.
Contractor
The term ‘contractor’ includes any person carrying on a business which includes ‘construction operations’. Additionally, a contractor could be a business not involved with construction such as a supermarket chain, a bank, a group of pubs, a big chemist outlet, breweries, etc.
They can be a contractor if their expenditure on construction operations (i.e. doing up their own premises) exceeds a certain specified limit (see below).
Changes introduced from 6 April 2021
These changes now require a business to consider and review its previous 12-month period, to ascertain whether its cumulative construction expenditure has exceeded £3m (the new specified limit).
Before April 2021, a business was treated as a deemed contractor if it spent an average of £1m or more over a three-year period on qualifying construction operations.
The impact of this change
Businesses will no longer have to review its previous three years of expenditure.
The revised CIS tax legislation definition now relates to a rolling cumulative 1 year period. Accordingly, businesses will now need to regularly monitor and review their construction expenditure, to see if they have exceeded this new £3m construction limit.
If they have, they must immediately register as a contractor, with HMRC.
If you register late, then you will have missed out on filing monthly CIS contractor tax returns.
Big penalties could then be charged!
A subcontractor
A person is regarded as a subcontractor, if, under the contract:
he is under a duty to the contractor to carry out the operations, or to furnish his own labour;
he is answerable to the contractor for the carrying out of the operations by others, whether under a contract, or under arrangements made or to be made by him.
The term subcontractor includes:
Bob the builder, a self-employed individual;
Bob Building Partnership;
Bob the Builder Ltd;
a labour agency which contracts either to get the work done with its own workforce, or to supply workers to a contractor.
An individual subcontractor has to be truly self-employed. Remember that PAYE overrides CIS!
Construction operations
This term is very widely defined in Finance Act 2004, s. 74. As a general guide, it covers almost anything that is done to a permanent or temporary building, structure, works or civil engineering or installation including:
construction, alteration, repair, extension, demolition or dismantling of buildings or structures;
construction, alteration, repair, extension or demolition of any works forming, or to form part of the land forming, or to form, part of the land;
installation (i.e. not repair) in any building or structure of systems (note it has to be a system) of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation or fire protection;
internal cleaning of buildings and structures, so far as carried out in the course of their construction, alterations, repair, extension or restoration;
painting or decorating the internal or external surfaces of any building or structure.
The legislation states that certain operations are held not to be construction operations for the purposes of the scheme. These include:
drilling for, or extraction of, oil or natural gas;
manufacture of building or engineering components or equipment, materials, etc. or delivery of any of these things to site;
the professional work of architects or surveyors;
the making, installation and repair of artistic works;
sign writing and erecting signboards and advertisements;
the installation of seating, blinds and shutters;
the installation of security systems.
Construction Operations: General Comments
1) Works forming part of the land
All types of construction works that do not involve buildings or structures are called ‘works forming part of the land’.
Examples:
minor works, such as a wooden fence with concrete posts;
major works to externally located plant such as work on a gasometer;
industrial plant such as petrochemical plant, a silo, tank or water treatment plant.
Alteration, repair and demolition or works forming part of the land are most definitely construction operations.
2) Artistic works
All works that are wholly artistic are not regarded as construction operations.
3) The Installation of a System
It is only the installation of a system that qualifies as construction operations. For example, when a subcontractor repairs an air conditioning system, this is not within CIS.
4) Architects
If operating within their normal professional discipline architects are subject to the exclusion from CIS. However, some architects may go beyond providing a building design, and undertake to manage the project for a contractor. In these circumstances, the architect is also acting as a developer or project manager and the exclusion no longer applies.
5) Landscaping
Routine landscaping is excluded from CIS, if undertaken in isolation. However, if the landscaping is undertaken as part of a finishing operation, and is in the construction specifications, then such landscaping is within CIS.
What do you deduct CIS tax from?
Example
An accountant has a CIS contractor client, who regularly engages net registered building subcontractors.
The contractor deducts CIS tax from the labour element of their bill, but pays the materials costs gross.
What qualifies for this CIS tax purpose as materials?
Answer
Materials
Materials include the costs of:
paving slabs;
bricks;
piping;
fixings that a subcontractor supplies as part of the construction project.
HMRC treat materials as also including the cost of renting or hiring plant, equipment or scaffolding from a third party.
The term materials does not cover the:
(a)cost of using plant or equipment owned by the subcontractor; however (b)consumables such as fuel for this plant or equipment can be claimed.
The amount for materials which can be paid gross is restricted to the direct cost to the subcontractor of the materials used in the construction operations. CIS tax must be deducted from the profit element (i.e. the mark up) on materials.
The subcontractor must indeed pay for materials himself, in order to obtain a CIS materials deduction.
Verification
Contractors have to verify new subcontractors when they first engage them.
The contractor will give the subcontractor’s details to HMRC.
HMRC will then advise the contractor to pay the subcontractor either gross or net.
Question
How long does CIS verification last for?
Answer
The legislation states that a CIS contractor does not have to verify a subcontractor if they last included that subcontractor on a CIS tax return in the current or two previous tax years.
Conclusion
The CIS tax responsibilities of a contractor within the industry are considerable. Care is needed in order to meet the tax legislation requirements. It is also vitally important to appreciate what is and what is not qualifying construction operations.
Contact Ashored for more information and support on the Construction Industry Scheme.
