Reed Smith Client Alerts

Authors: Siobhan Hayes

The Construction Industry Scheme (‘CIS’) requires contractors to withhold tax from payments to subcontractors in relation to certain construction work. It is easy to assume that CIS only applies to mainstream contractors, but the broad definition of ‘contractor’ may also extend to landlords making payments to tenants where tenants have contracted to carry out construction works.

A Landlord can be a ‘Deemed Contractor’

Landlords who spend an average of £1 million a year over three consecutive years on ‘construction operations’ (which includes demolition, alterations, repairs, painting and decorating etc.) will be deemed a ‘contractor’ for the purposes of CIS. HMRC guidance gives the following examples of bodies and businesses that are ‘deemed’ to be contractors if they spend an average of more than £1 million a year on construction operations:

  • Non-construction businesses, such as large manufacturing concerns, departmental stores, breweries, banks, oil companies and property investment companies
  • Local authorities
  • Development corporations or new town commissions
  • The Commission for the New Towns
  • The Housing Corporation, housing associations, housing trusts, Scottish Homes and the Northern Ireland Housing Executive
  • Any public bodies named in the regulations, such as National Health Trusts or Health and Social Services Trusts
  • Public offices or Departments of the Crown (including any Officer of the House of Commons and the Scottish Parliamentary Body)

A Tenant can be a ‘Subcontractor’

A subcontractor is any business that carries out construction work for a contractor.

Contractors making payments to subcontractors are bound to withhold tax from such payments (after first taking off VAT and certain excluded elements, such as the cost of materials) to subcontractors at the following rates:

  • 30% (if the tenant is not a registered subcontractor)
  • 20% (if the tenant is a registered subcontractor at the lower rate)
  • 0% (if the tenant is a registered subcontractor who can receive gross payments)

Deductions and Mixed Contract Payments

Where a contract includes some work that is within the CIS and some that has nothing to do with construction at all, HMRC will treat all payments made under that contract as coming within the CIS - even if different types of payments are shown on separate invoices. In order to avoid this, the parties should consider setting out their respective obligations with regard to construction operations and related payments in a separate agreement.

What should landlords do if they are deemed to be contractors under the CIS?

  • Register with HMRC – all contractors (including ‘deemed contractors’) must register with HMRC. This can be done online or by calling HMRC.
  • Verify the CIS status of the ‘subcontractor’ to establish the level of the deduction before making a payment by calling HMRC or checking online. From April 2017, this will need to be done using HMRC’s online system, unless the contractor has agreed a different verification method.
  • Deduct the relevant percentage of tax. Tax will need to be deducted from the amount paid to the subcontractor, less any VAT and certain excluded elements (such as the cost of materials).
  • Provide written statements to the subcontractor, which include the verification reference number issued by HMRC, and confirm the gross payment (excluding VAT), cost breakdown showing deduction for materials, and the amount of tax deducted. Keep an identical record to evidence CIS compliance.
  • Submit a monthly return to HMRC using the online system (within 14 days of the end of the ‘tax month’, being the fifth day of the relevant month). There is no requirement to submit a nil return where no payments to subcontractors have been made that month, provided contractors notify HMRC prior to the filing deadline that no such payments have been made.
  • Notify HMRC of any change of trading status, address, or change of instruction from subcontractor.

What should tenants do?

While the burden of CIS compliance rests with the contractor, subcontractors are also obliged to maintain records and notify HMRC of any changes. However, if cash flow is important to a tenant who is a subcontractor, it can elect to register with HMRC to receive payments gross or with the 20% lower rate of deduction (subject to meeting the relevant requirements). If deductions are made, these can be offset against PAYE tax and National Insurance contributions due from the subcontractor in respect of payments to its employees.


Reverse premiums, such as landlord payments to tenants to take the lease, are excluded from CIS. To fall within that exception, the relevant payment must be a pure ‘inducement’ for the tenant to enter into the lease, and not a payment to the tenant for carrying out works that are for the landlord’s benefit, or that the landlord would otherwise be obliged to carry out under the lease.


Penalties for a failure to file a CIS return depend on the length of time elapsed between the filing date and the date the return is eventually filed. Penalties range from nominal fixed penalties of £100 to £300, to tax-geared penalties (5% of any deductions shown on the return) where the return is more than six months late.

Agreements for Lease

Suitable provisions need to be included in agreements for lease and, in particular, the agreement needs to be very clear on the reason for any landlord’s payment to its tenant. Where a payment is likely to fall within CIS, appropriate wording enabling the relevant landlord deduction should be included within the agreement.


Client Alert 2016-293