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Construction Industry Scheme CIS is a mandatory tax deduction system in the construction industry. Contractors are required to register under the scheme first, whilst it is optional for subcontractors. Registered subcontractors only pay taxes at 20 per cent, whilst unregistered ones pay 30 per cent, deducted from their net pay. If eligible, subcontractors can apply for gross pay, which means no salary deductions on the condition that they settle tax matters by themselves.
It is not immediately apparent how tenants are involved in the scheme. But if handling some construction operations is a part of their lease agreement with the landlord or if they are hired to do so, they might have to seriously consider whether they are covered by CIS or not. If it doesn’t include a construction contract, then they’re exempt from CIS, but if they are, they will have to find ways to mitigate the cash flow problems from being under the scheme.
This article serves as a guide to CIS exemption, especially in the case of commercial tenants, starting from what is generally considered for CIS exemptions, how commercial tenants get exempted, the benefits of the exemption, how to apply for it, and more.
What is CIS Exemption and Who Qualifies for it?
Individuals under Pay As You Earn (PAYE), who are considered employees, are automatically not considered under the scheme or as subcontractors. However, when they start undertaking projects, their previous status (whether employee or not) will be irrelevant. The basis will be on the particular engagement that they have with their client or contractor.
Some construction contract work immediately subjects the contractors and subcontractors to CIS, such as these:
- Demolition
- Alterations, repairs and decorating
- Site preparation
- Installation of systems for power, heating, ventilation, security systems, burglar alarms, and lighting
- Building work
- Cleaning construction sites after completing the work
If their construction work’s average expenses amount to more than £1m in the period of three years or some months within the period, they are automatically considered to be within CIS. If not, considering the rest of the criteria for CIS exemption, they will be exempted under the scheme.
Generally, exemptions to CIS apply to the following:
- Working directly under a person or client who owns or occupies the residential property;
- Specific types of work, usually consultative and not involving actual construction or supervision work, that are automatically outside CIS tax (e.g., surveying, quantity surveying, architecture, structural engineering calculations, designs, delivering materials, carpet fitting, scaffolding hire, etc.);
- Working on a construction site, either not for sale or rent, for one’s own business;
- Working with a small contract amounting to less than £1,000, excluding materials
- Subcontractors working for their own property using their bank account amount of less than £1,000, excluding materials
- Being paid by a charity or trust or any governing body on behalf of the education authority or head teacher
If any of these apply, they may be eligible for exemptions. CIS exemptions mean the individual undertaking construction work will receive payment in full and not be under the CIS’ mandatory tax deduction system nor have to register to HMRC as a contractor or subcontractor. Take note that being CIS-exempted is different from registering as subcontractor and applying for gross payments, as the latter is still within the scheme.
In the case of tenant-to-landlord relationships, the landlord can be the contractor whilst the tenant subcontractor. Tenants can be a contractor as well if they hire workers to do the job. Aside from their work fitting in any of the abovementioned criteria, commercial tenants can apply for CIS exemptions to not have their tax return deducted under the scheme when they also fall to the following criteria:
- Payments are reverse premium
- Tenants work for tenant fit-out projects
- Tenants or a group company undertakes a construction project for their own business
- Construction work costs less than £1m in the last three years
- Single construction work costs less than £1,000 excluding materials, otherwise called small contract
Most landlords or tenants become deemed contractors when their business is not in the construction industry, but they hire their tenants or property developers to do some work. They are usually not registered as a contractor, as well as subcontractor. On the other hand, mainstream contractors can be a construction company or individual whose nature of business is providing construction services.
If the contract only needs less than £1,000, excluding the cost of materials, to complete the work, landlords who are deemed contractors do not have to register under the scheme. CIS exemptions will also apply when subcontractors work directly for the person who occupies or owns a residential property (e.g., housing associations, local authorities, etc.) even if the work involves more than the amount above, as long as it is less than £1m in each of three previous years and the landlord’s main activity is not construction.
How to Apply for CIS Exemption
Once commercial tenants fit the abovementioned criteria for CIS exemptions, they can apply to HMRC for exemptions. The process is so simple and straightforward. They can request authorisation from HMRC to not have to apply under the CIS scheme by calling CIS helpline and providing the following details:
- The construction work to be provided
- Who will be executing the work
- Where the work will be executed
- The cost of the work
However, if they do fall under CIS, tenants have different ways to mitigate the cashflow problems caused by having to pay CIS taxes upfront, especially when the CIS deductions is relatively large and their PAYE tax and national insurance are supposed to be smaller. They can go through CIS registration and register as subcontractors to get only 20 per cent tax deductions instead of 30 per cent, if unregistered. CIS-covered landlords/tenants can also find out more about the tips on how to reduce tax on rental income.
Another way is to separate the payments, such as through reverse premiums, as they are most likely exempt from tax deductions. Finally, they can apply for gross payment status, especially when their pay is more than £3 million, which can be the most hassling process of all. HMRC does not easily grant this status to tenants without adequate history working in the construction sector, and the CIS registration can take as long as three weeks.
Being granted this status doesn’t mean they are CIS-exempted, only that they receive payment in full. They will still have to complete their CIS returns, report their income, and settle their taxes by themselves within the accounting period deadlines or with the help of taxation services professionals.
Benefits of CIS Exemption for Commercial Tenants
CIS tax is not an additional tax. It is just the most upfront way to pay taxes–HMRC’s tax evasion prevention measure to ensure subcontractors pay the taxes they owe. Before contractors pay subcontractors, they deduct the taxes first as an advance payment to HMRC, which means subcontractors will not have to handle taxes by themselves by the end of the tax period.
However, this can cause cashflow problems for subcontractors, so it is up to tenants to check whether CIS covers their work or not. If not, they can proceed to applying for exemptions, which means they will not be obliged to pay income tax and National Insurance contributions at all, nor have to register as subcontractors and submit CIS returns regularly. But if they do, they can also check if they are eligible for capital allowance on furnished holiday let.
Being CIS-exempted benefits the subcontractors significantly, as they can keep the income for themselves, are not required to go through any registration processes, and do not have to partake in the hassles of submitting returns. For contractors, they will not have to make CIS payment and deduction statements for the payments made to their subcontractors.
However, this is not always the case, especially when the cost of their project exceeds the small contract threshold and they are then caught in the scheme. In order to avoid the hefty 30 per cent tax deductions, they must register as subcontractors to avail of the 20 per cent tax deduction or apply for gross payment, both of which they will still have to make CIS returns for.
It’s crucial they clarify their statuses first and do the necessary paperwork before they partake in any projects to avoid being suspected of tax evasion by HMRC, which can attract hefty fines and penalties.
How Legend Financial Can Help
Small tenant fit-out contracts between tenants and landlords (subcontractor-contractor) are usually CIS exempted, provided that they meet the rest of the criteria. When proven to be eligible for CIS exemption, they don’t have to register as contractors or subcontractors to HMRC, get no salary deductions for advance tax payments, and are not obliged to complete CIS returns.
Before doing any project, it’s best for tenants to play on the safe side, first making sure whether they are caught in CIS or not to avoid tax fraud suspicions and penalties, even VAT fraud. If they are fortunately not under the scheme, they can ask for tax professionals to help ensure they pass through the application smoothly and be granted an exemption.
Legend Financial is here to help you get this matter straight, as we have in-depth experience on everything about CIS taxes and have helped a lot of contractors and subcontractors in tax planning and settling their liabilities. Reach us today!
References
What is the Construction Industry Scheme (CIS)? (n.d.). Retrieved from Low Incomes Tax Reform Group: https://www.litrg.org.uk/tax-guides/self-employment/what-construction-industry-scheme-cis
CONSTRUCTION INDUSTRY SCHEME (CIS) EXPLAINED AND GUIDE. (2 June 2020). Retrieved from VW Taxation: https://vwtaxation.com/construction-industry-scheme-cis-explained-and-guide/
What is exempt from CIS? (22 February 2021). Retrieved from EEBS: https://eebs.co.uk/resources/what-is-exempt-from-cis/
What you must do as a Construction Industry Scheme (CIS) contractor. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/what-you-must-do-as-a-cis-contractor/who-is-covered-by-cis
Who is exempt from the Construction Industry Scheme (CIS)? 29 September 2022. Retrieved from Powered Now: https://www.powerednow.com/blog/who-is-exempt-from-the-construction-industry-scheme-cis
CONTRACT LABOUR – CIS SUB CONTRACTORS TAX EXEMPTION CERTIFICATE. (n.d.). Retrieved from SMART Factoring Quotes: https://www.invoicefactoringquotes.co.uk/guidebook/contract-labour—cis-sub-contractors-tax-exemption-certificate/
Construction Industry Scheme – How it works. (15 March 2021). Retrieved from BDO United Kingdom: https://www.bdo.co.uk/en-gb/insights/tax/global-employer-services/construction-industry-scheme-the-facts
Construction Industry Scheme. (n.d.). Retrieved from HM Revenue & Customs: http://www.hmrc.gov.uk/gds/cisr/attachments/cis340.pdf
What Is CIS Tax? – Ultimate Guide To The Construction Industry. (n.d.). Retrieved from Patterson Hall Accountants: https://www.pattersonhallaccountants.co.uk/what-is-cis-tax/
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