CIS for Property Investors and Developers
What is CIS? The Construction Industry Scheme (CIS) was created by HMRC for contractors and subcontractors with the purpose of reducing the risk of tax evasion within the construction industry. CIS applies to all payments made by a contractor to a subcontractor under a construction contract.
Does it apply to Property Investors/Developers? Importantly for this audience, HMRC determine that property developers are classed as contractors and are therefore required to register for CIS and provide monthly reporting and make deductions when paying subcontractors in line with CIS direction. Property investors in most circumstances are not required to be CIS registered. HMRC have the following to say about property investment with regard to CIS:
“Where a business that is ordinarily a property investor undertakes some activities attributed to those of ‘property development’, they will not usually be considered a mainstream contractor during the period of that development. This is because the usual nature of the business is 'property investment' and not 'property development'. Where a property investment business enters into multiple or substantial contracts relating to construction operations for the purposes of development of one or more properties, the business will need to decide if the nature of its business has changed from 'property investor' to 'property developer', in which case they would be considered to be mainstream contractors as the nature of their business has changed.”
What activity is classed as ‘Construction’? The term ‘Construction' includes building, assembling and putting together. It will include work, site work and services during construction such as plumbing and electrical work. ‘Construction’ excludes architects and surveyor’s fees, building inspectors, site cleaning and ongoing repairs and maintenance following construction.
What are the requirements under CIS? Under CIS contractors must register with HMRC before making payment to sub-contractors. Contractors (including property developers) are required to make an assessment of each subcontractor before making any payment to them. They are required to take the following action depending on the status of sub-contractor:
Gross Status. No tax deduction is required.
Registered for CIS but not eligible for gross payments. 20% deduction against invoice.
Not registered for CIS. 30% deduction.
An allowance is given for the cost of materials and plant hire.
Reporting and Penalties. Under CIS contractors are required to send monthly returns to HMRC including payment of CIS deducted when paying subcontractors. The contractor is also required to inform HMRC if there are any changes such as subcontractors are no longer being paid.
The Penalty for a late return is £100 with a further penalty of £200 if the return is more than two months late. Penalties of £300, or 5% of tax due, are applied after six and twelve months. Penalties increase if the taxpayer is deliberately withholding information.
How Can I reduce the Administrative Burden of CIS? A property developer could consider only employing a main contractor who is registered under CIS with Gross Status. This would mean that the developer would not have to deduct payments during the invoicing process and would prevent the requirement to deal with multiple individual sub-contractors. Note that there would still be a requirement to be registered for CIS and create monthly reports to HMRC, even if no payment deductions have been made.
A second method would be to employ a bookkeeper to take the pain away from having to report monthly to HMRC and calculate payments. This would ideally be done alongside a full bookkeeping service.
Please ensure if you are operating as an investor on more advanced projects that you check whether you are required to register for CIS. For property developers ensure you are aware of the requirements under CIS and make reports on time in order to avoid penalties.
If you require assistance with CIS then Accufy Accounting are able to assist. Please get in touch for a quote.
Click here for more blog posts on property tax and investing.