254: What is the Construction Industry Scheme and what reforms are being made?

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax collection mechanism operated by HMRC which ensures tax is properly accounted for on payments made to sub-contractors carrying out construction work. Simply put, it allows contractors to deduct money from subcontractors’ payments and pass it directly to HMRC.

The scheme is complex, but in summary you need:

• a contractor – a person carrying out business which includes construction operations;
• a subcontractor – a person under a duty to the contractor to carry out construction operations or answerable to the contractor for carrying out operations by others;
• a contract payment – payment made under a construction contract to the subcontractor, or made to a person identified by the subcontractor or contractor;
• a construction contract – a contract between the contractor and subcontractor which includes a contract payment and covers construction works; and
• construction operations – include any kind of building works, demolition works, preparing a site, alterations, repairs, decorating, installing systems etc.

Contractors must register for the scheme. Subcontractors do not have to register, but deductions will be made at a higher rate if they are not registered. When contractors deduct money from a subcontractor’s payments and pass it to HMRC, the deductions count as advance payments towards the subcontractor’s tax and National Insurance.

What are the changes being made to the CIS?

Last year, HMRC consulted on various aspects of the operation of the scheme. The Government announced legislative changes via the Autumn Statement 2023 to give effect to certain of the consultation proposals.

The changes focus on reforming areas of the CIS Gross Payment Status rules, that have previously been open to abuse, and simplifying how CIS interacts with reverse premiums paid from landlords to tenants for construction works.

Reverse premiums

An area discussed in the 2023 consultation was how to simplify the exception for reverse premiums. Reverse premiums are payments made by a landlord to a tenant to cover construction works, which are given as an inducement for the tenant taking the lease (for example, to cover fit out costs). These reverse premiums are currently excluded from the scope of the CIS.

From 6 April 2024, the majority of payments from landlords to tenants will be completely removed from the scope of the CIS.

Various stakeholders had lobbied for a wider exemption to exclude all payments from landlords to tenants from the scope of CIS. However, the consultation concluded that the complete removal of all payments from landlords to tenants would create the risk of exploitation by landlords trying to avoid the scheme.

With effect from 6 April 2024, a payment from a landlord to a tenant, where the tenant engages a subcontractor (in writing) to complete any construction work on the property occupied by the tenant will be treated as outside the scope of the CIS. While this means that a tenant doing fit out works without engaging a contractor would still be caught, this measure does provide some respite.

Other changes

The grounds for immediate cancellation of the CIS Gross Payment Status Rules will be expanded to include VAT, PAYE, Income Tax Assessment and Corporation Tax Assessment. This will allow HMRC to immediately cancel the status if it has reasonable grounds to suspect that a fraudulent return has been submitted.

VAT obligations will be added to the CIS Gross Payment Status compliance test. The scope of the compliance test for sub-contractors to obtain and retain gross payment status will be broadened, so that it will require subcontractors to demonstrate compliance with VAT filing.

The first review of a CIS Gross Payment Status holder’s compliance history will be brought forward from 12 months after application to six months (reverting to 12 months thereafter).

Please get in touch if you require any advice on CIS or the proposed changes.