News & Insights

The construction industry scheme

If your company is spending more than £1m annually on construction operations, it is likely that a withholding tax scheme operated by HMRC will apply to the payments you make. Non-compliance can involve severe penalties. This guide provides an overview of the scheme.


The Construction Industry Scheme (‘CIS’) is a statutory tax scheme that provides for certain payments under ‘construction contracts’ to be subject to tax deduction by the payer, unless the payee is registered with HMRC to receive payments gross.  Unsurprisingly, the aim of the system is to eliminate payments which the payee does not declare for tax purposes, and much like VAT is based on the parties to a contract collecting the tax rather than HMRC itself.


CIS applies to payments made by what the legislation defines as ‘mainstream contractors’ (i.e. construction businesses) or by ‘deemed contractors’.  Deemed contractors are persons carrying on a business who spend more than £1 million on ‘construction operations’ annually when looked at over a 3 year period.  The requirement for a business to be carried on means that CIS does not apply to domestic occupiers but does apply to public bodies, local authorities, NHS Trusts etc.  Charities are also excluded from the application of CIS.

The result is that if you spend more than £1 million annually on construction operations in furtherance of a business then in all likelihood CIS will apply to those payments.

Construction Operations

The meaning of construction operations is wide and covers work carried out by an individual as well as by a company.  Construction operations includes construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not).  It also includes installation of systems such as heating or lighting, painting or decorating and site preparation works.

Payment can take any form, and even if only part of the payment relates to construction operations then CIS applies to the whole payment.

The definition of construction operations does not include payments for work on property used for the purpose of a person’s own business (such as their head office), and payments under £1,000 are also excluded.  This means that maintenance work to a business’s own office and other very small pieces of work do not fall within the remit of CIS.

Contractors and Sub-Contractors

Confusion is often caused by the definitions of ‘Contractor’ and ‘Sub-Contractor’ used by the CIS legislation.  These definitions are different to the terminology generally used in construction contracts, and can often lead developers in particular to conclude that CIS does not apply to them. The definition of deemed contractor means that a developer who falls within that definition is referred to for the purposes of CIS as a ‘contractor’, even though under the building contract they are referred to as the ’employer’.  In summary, a contractor under CIS is someone who makes payments for construction operations.  A ‘sub-contractor’ under CIS means a party receiving payments for construction operations.  Thus:

  • a developer is referred to as a ‘contractor’;
  • a main contractor is both a ‘contractor’ and a ‘sub-contractor’ (as it receives payments from the developer and makes them to its true sub-contractors); and
  • true sub-contractors are still referred to as ‘sub-contractors’ as they only receive payments.

Practical Impact

The practical effect of all this is that if CIS applies to the construction operations in question then payments made for those operations by either the developer or the main contractor must be paid net of tax unless the sub-contractor is registered with HMRC to receive gross payment (remembering here that ‘sub-contractor’ means for the purposes of CIS, and not as the term is commonly used).

In order to register to receive gross payment the sub-contractor must be a business that is run in the UK with a UK bank account, with a minimum turnover (which varies but is never less than £30,000 per year) and can demonstrate compliance with its tax obligations during the immediate past.

A sub-contractor that cannot meet this test can register to be paid net of tax at 20% (the tax rate that many businesses will pay anyway, although the deduction of tax at source may have a negative impact on cash flow).  If HMRC is not provided with sufficient details to allow it to verify that a sub-contractor exists and therefore register it, then the contractor must pay the sub-contractor net of 30% tax (which of itself is an incentive to be registered).

A contractor can verify  a sub-contractor’s CIS status either on-line or by calling an HMRC hotline.  In order to make use of this service the contractor must himself be registered under CIS.  A contractor must make monthly returns of the tax collected (or submit a nil return) to HMRC.

The penalties for failing to comply with this are severe – a fine of £3,000 for every month in which a return is not filed – so if you think that CIS may apply to you then it is crucial to include appropriate provisions in the relevant contract.  CIS can be relevant to many situations, including development agreements and forward funded developments, as well as to building contracts.  Reverse premiums paid by landlords are not caught, but each development situation needs to be looked at on its facts at an early stage.