How the Construction Industry Scheme can apply to financial services firms

If a non-construction business spends more than £3m on construction operations over any rolling 12-month period, it will be considered a ‘deemed contractor’ for CIS purposes. Any business meeting this criterion is immediately required to register for CIS within a month of breaching the threshold.

Money spent by financial services organisations on construction work (e.g. the construction or renovation of a building or structure such as an office building) falls within the scope of CIS.

Examples of specific works that fall within the scope of CIS include:

• Preparation of the construction site.
• Building work.
• Renovations such as alterations and repairs, and painting and decorating.
• Installation of systems such as heating and lighting.
• Demolition and dismantling.
• Cleaning of the building post completion of the works.

Specific works that do not fall inside the scope of CIS include:

• Professional services such as architecture and surveying (but not where the professional is also acting as a developer or where they have project management or supervisory roles).
• Making and delivering materials used in construction including plant and machinery.
• Scaffolding (not including labour costs).
• Carpet fitting.
• Non-construction work that takes place on construction sites (e.g. catering).

There is a wider exemption from CIS where the building being constructed or renovated is intended to be used entirely for the purposes of the organisation’s own business. However, in these circumstances the organisation is still required to register once the £3m threshold is reached, it can immediately de-register upon confirming to HMRC that it qualifies for the exemption (known as Regulation 22).

It should be noted that this exemption does not apply where the organisation intends to sell or sublet the building or hold it as an investment. For example, if the organisation builds an office but then sublets certain floors to another organisation, the spend on the construction of that office falls within the scope of CIS. The payment is also in the scope of CIS where it is made directly to the business for the purposes of refurbishing the space it has leased from the owner of the building though in certain circumstances an exemption may apply.

Once registered, the deemed contractor must file monthly returns to HMRC declaring all payments to subcontractors within the scope of CIS and any associated CIS withholding. As part of this exercise, the contractor will need to separate out costs relating to materials and labour, as only the latter will be in the scope of CIS.

The contractor also needs to file nil returns where no payments have been made, although a six-month deferral can be applied for where no CIS payments are expected to be made during that initial period.

Where deductions are made, the subcontractor must be issued with a payment and deduction statement advising them of the amounts deducted for CIS purposes.

Deemed contractors may de-register from CIS at a later date once construction related spend falls below the £3m threshold in a rolling 12-month period. We would always advise organisations to only de-register where it is known the £3m threshold will not be exceeded again for the foreseeable future (e.g. upon completion of a specific project).

Where multiple entities within the same group are deemed contractors for CIS purposes, the default position is that each must complete its own CIS registration and file returns accordingly. The £3m threshold should be considered and assessed against each individual entity.

In some circumstances, it is possible for one entity to be appointed to manage CIS compliance on behalf of others in the same group. This can happen where one entity is at least a 75% owned subsidiary of another, or both are at least 75% owned subsidiaries of the same parent. Authorisation must first be obtained from HMRC before filing CIS returns on this basis.

It should also be noted that intra-group transactions related to construction work are potentially in the scope of CIS. Therefore, CIS returns must be filed where the work is in scope and withholdings made on the payment where the subcontracting entity does not hold gross status.

Yes. For example, if an organisation is receiving payments in relation to construction activities (e.g. a loan from a parent company to build an office it intends to sublet or part sublet), and then makes onward payments to subcontractors to complete this work, both transactions are within the scope of CIS and potentially subject to CIS withholdings.

The parent company and the subsidiary would be treated as separate contractors under CIS, so the respective loan payment made by the parent company and onward payment to the subcontractors by the subsidiary would be treated as part of that particular entity’s construction spend when assessing whether the £3m threshold has been breached (rather than all construction spend across the group being assessed as a whole).

The VAT domestic reverse charge was introduced in 2021 and applies to all works in the scope of CIS. This means where the subcontractor is VAT registered, they must account for and pay the VAT due to HMRC directly as opposed to this being done by the contractor. Where this is the case, the contractor must state on the invoice that the domestic reverse charge applies, along with the amount of applicable rate of VAT.

Where the subcontractor is not VAT registered or their registration status cannot be verified, normal VAT rules apply, and the contractor is responsible for accounting for and paying VAT to HMRC.

Where a deemed contractor fails to register for CIS and file returns as required, HMRC will charge penalties for each late return. The penalties are usually fixed amounts or 5% of the withholding liability charged at various milestones after the deadline. However, HMRC may levy additional penalties where the failure to register for CIS or file returns is deemed to be deliberate. Interest will also accrue on late payments of CIS withholdings to HMRC.

Aside from HMRC penalties, failure to comply with CIS may also lead to other consequences for financial services organisations such as:

• Unexpected CIS liabilities leading to significant provisions being made in the accounts.
• Increased scrutiny from HMRC in respect of all areas of employment tax compliance.

HMRC are currently increasing the number of CIS compliance reviews they are carrying out. So, it is essential to ensure your organisation is compliant where it is paying subcontractors to carry out construction work.

If the construction work is taking place in the UK, then CIS still applies where one of the contracting parties is based overseas, even where it has no UK presence and is not liable for UK taxes such as corporation tax and PAYE. It is a common misconception that non-UK resident organisations are not in the scope of CIS and therefore is often an error that leads to penalties being charged by HMRC.