What is the Construction Industry Scheme and how does it affect developers?

The Construction Industry Scheme (CIS) is a tax system introduced by HMRC to ensure that contractors deduct tax from payments made to subcontractors working in construction. The deducted amount is then paid directly to HMRC and counts toward the subcontractor’s tax and National Insurance contributions.

For property developers, understanding how CIS operates is essential, as it determines whether you need to register as a contractor and how you handle payments to subcontractors.

What is the Construction Industry Scheme?

CIS applies to most construction work carried out in the UK. It covers activities such as building, demolition, site preparation, alterations, repairs, and installation work. Under the scheme, contractors must deduct tax from payments to subcontractors and send this to HMRC.

The standard deduction rate is 20% for registered subcontractors and 30% for those who are unregistered. Subcontractors with gross payment status can receive payments without deductions if they meet HMRC’s compliance requirements.

The scheme aims to prevent tax evasion and ensure that those working in the construction sector pay the correct amount of tax throughout the year rather than waiting until the end of the tax period.

Who counts as a contractor or subcontractor?

A contractor is any individual, business, or organisation that pays subcontractors for construction work. This includes:

• Construction companies and building firms

• Property developers that hire subcontractors directly

• Businesses that spend over £3 million on construction within a 12-month period, even if construction is not their main trade

A subcontractor is anyone who carries out construction work for a contractor under an agreement. Subcontractors can be sole traders, partnerships, or limited companies.

Developers often find themselves classified as contractors under CIS if they commission building or renovation work on development projects and pay subcontractors to complete parts of the construction.

When developers must register for CIS

Developers must register as contractors if they:

• Pay subcontractors to carry out construction work

• Spend more than £3 million on construction within any 12-month period

Registration is required even if the development is for the developer’s own use rather than resale. For example, a property investment company that builds office space for its own business operations can still fall under CIS rules.

If you are a developer hiring subcontractors, you must register with HMRC as a CIS contractor before paying them. You will then be responsible for verifying their status and making the correct deductions.

How CIS affects property developers

CIS has several implications for developers. It changes how payments are made, how records are kept, and how cash flow is managed.

1. Deduction and payment obligations

When a developer pays a subcontractor, they must deduct 20% or 30% from the payment, depending on the subcontractor’s registration status. The deducted amount is then sent to HMRC by the 19th of the following month.

For example, if a subcontractor issues an invoice for £5,000, a 20% deduction (£1,000) is made, and the developer pays the subcontractor £4,000. The £1,000 is paid to HMRC.

Subcontractors can later reclaim these deductions when completing their tax return or offset them against their Corporation Tax if they operate as a company.

2. Verification and compliance checks

Before paying any subcontractor, developers must verify their status with HMRC. This verification confirms whether the subcontractor is registered and what deduction rate applies.

Developers must also issue payment and deduction statements to each subcontractor showing the gross amount, deduction, and net payment. These statements are essential for subcontractors to reclaim their tax correctly.

3. Monthly CIS returns

Developers must submit a monthly CIS return to HMRC showing all payments made to subcontractors and deductions applied. The return is due by the 19th of each month and must include:

• Subcontractor names and UTRs (Unique Taxpayer References)

• Gross payment amounts

• Deductions made

• Confirmation that all subcontractors have been verified

Late filing or incorrect submissions can result in penalties, so accurate record keeping is vital.

4. Impact on cash flow

CIS deductions can affect a developer’s cash flow, particularly when managing multiple subcontractors. Since payments to HMRC must be made monthly, it is important to budget for these deductions and ensure adequate funds are available.

Subcontractors may also request gross payment status to avoid deductions and receive full payment. Developers must verify this with HMRC before applying it.

Work excluded from CIS

Not all construction-related activity is covered by the scheme. Examples of excluded work include:

• Architecture and surveying

• Carpet fitting

• Manufacturing materials delivered and installed by others

• Work on property owned and occupied by the developer (in certain cases)

If you are unsure whether a particular activity falls under CIS, HMRC provides guidance based on the nature of the work and the relationship between the parties involved.

Penalties for non-compliance

Failure to comply with CIS obligations can result in fines, interest, or tax liabilities for developers. Common compliance issues include:

• Failing to register before paying subcontractors

• Making incorrect deductions

• Missing monthly return deadlines

• Not verifying subcontractors’ CIS status

HMRC penalties can range from £100 for a late return to higher fines for repeated non-compliance. Persistent errors can also affect a subcontractor’s ability to obtain or maintain gross payment status.

Example of CIS in practice for a developer

A property developer hires a subcontractor to complete roofing work on a new housing project. The subcontractor issues an invoice for £20,000. After verifying the subcontractor’s CIS status, the developer finds they are registered under the standard 20% rate.

The developer pays £16,000 to the subcontractor and £4,000 to HMRC. The payment is reported on the monthly CIS return, and a deduction statement is issued to the subcontractor.

At the end of the tax year, the subcontractor can use that £4,000 deduction as a credit toward their final tax bill.

Benefits of following CIS correctly

For developers, compliance with CIS provides several advantages:

• It demonstrates transparency and good tax governance

• It protects against HMRC penalties and audits

• It helps maintain strong working relationships with subcontractors

• It ensures tax deductions are accurately credited and reconciled

Developers who implement CIS correctly also benefit from better financial management and fewer disputes with subcontractors over payment deductions.

Professional support for CIS compliance

CIS administration can be complex, especially for developers managing multiple subcontractors. Many developers choose to work with accountants or payroll services that handle CIS reporting, verification, and monthly returns.

Accountants can also help determine whether specific activities fall under CIS and ensure all deductions and payments align with HMRC requirements.

Conclusion

The Construction Industry Scheme is a mandatory tax system designed to regulate payments between contractors and subcontractors in the construction industry. For developers, it means registering as a contractor when hiring subcontractors, verifying their status, making the correct deductions, and filing monthly CIS returns.

By understanding and managing CIS obligations properly, developers can avoid penalties, maintain accurate tax records, and run construction projects smoothly. Staying compliant ensures that both developers and subcontractors meet their tax responsibilities and operate within HMRC’s guidelines.