Don’t get caught out for failing to register under the Construction Industry Scheme (CIS) as a Property Investor
There is a common assumption that property investors don’t have to register under the construction industry scheme and in the main this assumption is correct. But there are some specific situations where they should register under CIS leading to an onerous administrative burden. Failure to register could be costly as it is likely to result in significant penalties being levied for non-compliance.
Penalties for late submission of the monthly return will range from £100 for being a month late, up to £3,000 if it’s over 12 months late, depending on the circumstances. All penalties and CIS tax deductions that would not have been stopped on behalf of the subcontractor will be the contractor’s responsibility to pay over to HMRC.
What is the Construction Industry Scheme?
We have frequently written about the Construction Industry Scheme but briefly it is the requirement to potentially tax the labour element of any contractor who provides construction services to you. The definition of construction services is surprisingly broad and we covered this in more detail in our blog: Warning! Doing works on a property? You might need to operate a Construction Industry (CIS) scheme.
The first point to consider is whether you are a Mainstream Contractor
A Mainstream Contractor is a business that:
- carries out construction work, or
- supplies labour carrying out construction work.
They include the following:
- construction businesses (including foreign businesses carrying out construction work in the UK).
- property investors, developers or speculative builders erecting and altering buildings in order to make a profit.
- gang leaders organising labour for construction work.
Property developers are defined, by HMRC, as being any business, whose activity is:
- the creation of new buildings
- renovation or conversion of existing buildings
- civil engineering
- speculative builders (a business which has houses erected without securing buyers in advance).
So although you might think that CIS would never apply to your business in actual fact this might not be the case. You will need to consider the nature of your business alongside the CIS rules.
Here are some helpful examples that might help in determining whether or not CIS is applicable to your property investment business
Investment business A
This company has recently been incorporated and purchases its first property. The company engages a building contractor to redevelop the property suitable for a furnished holiday let. That would mean the company meets the mainstream contractor rules as this business is undertaking property construction works and the business would now need to register for CIS and verify each subcontractor for possible deduction.
Investment business B
This business has 10 buy-to-let properties. Repairs and maintenance are carried out on the properties including replacing bathrooms, kitchens and painting and decorating. This business is operating as a property investment business and would not fall under CIS as it only undertakes some activities attributed to those of “property development”. CIS would not need to be applied as long as the expenditure remains under the deemed contractor threshold rules which are £3,000,000 in a 12-month period.
Investment business C
This business has four buy-to-lets that have been rented for a number of years. They then purchase a 5th building with major building work required where building contractors are engaged. Most property investment business owners in that situation would either not consider CIS at all or believe they would not need to register for CIS as they were undertaking property investment. However, the actual position is that this company is now undertaking property construction works and the business would need to register for CIS whilst this project is being undertaken. When the 5th property is rented out, the construction works would have finished and you could then deregister from CIS.
It is worth noting that once a business is registered as a contractor under the Construction Industry Scheme then CIS must be operated on all expenditure relating to all CIS activities. For instance, all works carried out by business B would fall under CIS for business C.
Construction and property in general are areas full of opportunities and pitfalls so getting the right advice is crucial. At Friend & Grant we specialise in building and construction and property investment and development. If you need help and advice on CIS why not contact us and speak to one of our expert team. If you are already a client of Friend & Grant and have a query about CIS please speak to your account manager.
The content in this blog is correct as at 1st November 2022 See terms and conditions.