When deciding their responsibilities under the CIS, it is critical for a business or individual to understand the distinction between a property developer and a property investor (CIS). Failure to operate the system appropriately exposes a business/individual to HMRC inspection, with HMRC seeking and applying penalties for any under-deducted CIS tax. Thus, it is vital for property developers to follow the CIS regulations and remain compliant.
- What is a construction industry scheme?
- Buying property as an investment
- Mainstream and deemed contractors
- “De minimus” limit
What is a construction industry scheme?
The construction industry scheme (CIS) allows contractors of construction firms to deduct tax at source from payments paid to their subcontractors. Certain subcontractors are eligible to be paid without a deduction of tax, others at 30% in accordance with HMRC’s guidelines, but the majority have a tax deduction of 20% prior to payment. Contractor registration and monthly submissions are required for this scheme; penalties for non- and/or late submissions may be harsh.
Contractors are required to register with the scheme. Subcontractors are not required to register, but their payments are deducted at a greater rate (30% rather than 20%) if they are not registered.
Buying property as an investment
If we talk about the comparison, someone who purchases and rents property often does it as an investment; this appears to be verified by section 12080 of the construction industry scheme reform manual, which states:
"A 'property investment business' is not the same thing as a 'property developer'. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental.
However, a problem occurs when an investor landlord purchases a home and renovates it with the intention of keeping it as a rental property - is that individual now a developer and so subject to the CIS rules? HMRC confirms this is the situation, as stated further in the CIS manual:
"Where a business that is ordinarily a property investor undertakes activities attributed to those of “property development,” they will be considered a mainstream contractor [caught for CIS] during the period of that development.”
Thus, even if only one property is renovated, the investor becomes a developer and is required to register as a contractor under the CIS regime.
Mainstream and deemed contractors
Under the CIS, the term "contractor" refers to both businesses that engage in construction as a primary activity, such as property developers, building and construction businesses, telecommunications, utilities, transportation network, and infrastructure companies (known as "mainstream contractors"), and businesses that do not engage in construction but spend more than a certain amount on refurbishment work, known as "deemed contractors."
A business is considered to be a "deemed contractor" if its average annual spending on construction operations in the United Kingdom in the three years preceding its most recent accounting date exceeds the threshold of £1 million. "Construction operations" comprise activities such as site preparation, scaffolding erection, heating and lighting system installation, and painting and decorating. If a business has not yet traded for three years, it will be considered a "deemed contractor" in case its total expenditure on construction operations for the portion of that three-year period during which it has traded exceeds £3 million.
Once classed as a "deemed contractor," a business must keep CIS registration until it can demonstrate to HMRC that its spending on construction operations in the UK was less than £1 million in each of the succeeding three years.
Notably, the registration criterion for "deemed contractors" under the CIS has been changed from April 6, 2021. The new approach is planned to feature a rolling evaluation that will trigger the necessity to register when relevant construction expenditure exceeds £3 million in any 12-month period.
‘De minimus’ limit
De minimum limit is a limit set by HMRC allowing deemed contractors to not use the scheme for small contracts for construction operations of less than £1,000, excluding material costs. However, you cannot apply this arrangement to mainstream contracts.
Contact us today to see how we can assist you in staying compliant and get the benefit of our expert advice. If you are a property developer and have questions regarding CIS compliance, please speak to one of our dns experts right now on 03330 886 686, or you can also e-mail us at email@example.com.
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