Mitigating CIS risks and the domestic reverse charge

The Construction Industry Scheme (CIS) is a tax withholding scheme that applies to payments made by contractors to subcontractors for construction work. It helps ensure tax is correctly deducted and reported, reducing the risk of tax evasion in the construction industry.

CIS covers most construction work carried out in the UK, including site preparation, alterations, dismantling, construction, repairs, decoration and demolition.

Under CIS, contractors – which can include businesses or entities such as government departments or local authorities – must withhold tax from subcontractors who carry out construction work on their behalf. The rate of tax withheld depends on the subcontractor’s HMRC tax status. The contractor then pays the tax directly to HMRC.

Navigating the risks of falling within the scope of CIS

CIS can be complex, particularly when your day-to-day trade doesn’t usually involve construction. It’s important to be aware of how you might fall within the scope of CIS, even if construction isn’t your main business activity.

Deemed contractors

A deemed contractor is a business that doesn’t normally operate in the construction industry but spends significant amounts on construction work. If your business spends more than £3 million on construction within a 12-month period, you may be classed as a deemed contractor under CIS.

This means you must register with HMRC, verify subcontractors, and deduct CIS tax from payments you make to them. However, there are exemptions if the construction is carried out on buildings for use by your own business.

Property developers

It’s also easy to be pulled into the CIS regime if you're classed as a property developer. If that’s the case, there’s no annual spending threshold to consider.

While it might seem straightforward to define a property developer, it could include, for example, a large farm with surplus land that decides to build two properties, selling one for profit. Or it might involve a group structure where one company is tasked with managing construction projects and receives payments for those services. These scenarios could bring the activity within the scope of CIS because there's an intention to develop property for profit.

Hopefully these examples show how easily a business can fall within CIS, even if construction isn’t your main trade.

The relationship between VAT and CIS

CIS and the VAT Domestic Reverse Charge (DRC) have different purposes, but they often work together to support tax compliance.

The DRC shifts the responsibility for accounting for VAT from the supplier to the customer. It applies to supplies of construction services between VAT-registered businesses, where the customer is making an onward supply of those same services.

This means the supplier issues a VAT invoice stating that the reverse charge applies, but doesn't charge VAT. The customer must then account for the VAT themselves on their VAT return – recording it as both input and output tax.

The DRC only applies where both parties are VAT-registered businesses and the service is passed on. If the customer is the end user of the service, the DRC doesn't apply.

Mitigating risks

CIS can be a minefield. So, whenever you're entering into a contract involving construction work, it’s vital to assess whether the activity qualifies as a construction operation under CIS – and whether there’s a VAT impact too.

Regular reviews, clear record-keeping and speaking to our tax specialists can help you stay on the right side of the rules.

Need help?

If you're unsure about how CIS or the domestic reverse charge affects your business, we're here to help. Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk

Tessa Brown