'Deemed contractor' status under CIS

The Construction Industry Scheme (CIS) does not only apply to construction companies. If your business spends significant amounts on construction work, you may be a deemed contractor and must register with HMRC to operate CIS.

Getting this wrong can result in penalties, and you may become liable for tax that should have been deducted from payments to subcontractors.

What is a deemed contractor?

A deemed contractor is a business that:

• is not mainly in construction, but in something else such as retail, hospitality, property investment or manufacturing
• spends more than a threshold amount on construction operations, after which CIS rules apply to all its construction payments

The purpose of this rule is to prevent tax evasion in the construction sector. Large construction projects commissioned by non-construction businesses must still be subject to CIS deductions.

Are you a deemed contractor?

If your main business activity is construction, you are a mainstream contractor, not a deemed contractor. You must register as a CIS contractor as soon as you pay any subcontractor for construction work, and the £3 million threshold does not apply to you.

If you do not commission construction work, CIS does not apply to you. Construction operations include:

• Building or altering permanent structures
• Civil engineering works (roads, bridges, tunnels)
• Repairs, decorating, and refurbishment
• Demolition and dismantling
• Installing heating, lighting, power, water, ventilation, or air conditioning
• Constructing or maintaining structures for offshore oil and gas

If you do commission construction work, add up your spending on construction operations over any rolling 12-month period. Include labour costs paid to subcontractors, payments to construction companies for work done, and the labour element of combined labour and materials contracts. Leave out VAT, materials you buy directly, equipment hire without an operator, and professional fees such as architects' and surveyors', which are not construction operations.

If your construction spending exceeds £3 million in any rolling 12-month period, you are a deemed contractor.

Common businesses affected by deemed contractor rules

These types of businesses commonly become deemed contractors:

• property developers and investors, whose major developments, or refurbishment of large buildings or several properties, often exceed £3 million
• retailers with store fit-out programmes, where each project may be under £3 million but the rolling 12-month total is what counts
• hotels and hospitality businesses with major refurbishments, extensions or new builds, adding up spend across all sites
• manufacturers building new facilities, extending factories or running major maintenance programmes
• local authorities, NHS trusts, universities and housing associations, which CIS regulations list explicitly as contractors

What you must do if you are a deemed contractor

Once you exceed the £3 million threshold, you must:

What if I am approaching the threshold?

If your construction spend is approaching £3 million:

• Calculate your rolling 12-month total at the end of each month.
• Have CIS processes ready before you reach the threshold.
• Train your accounts team in verification, deductions and return filing.
• Consider payroll or construction management software that automates CIS.

You do not need to register until you exceed the threshold, but being prepared avoids a scramble when you do.

What if I have already exceeded the threshold without registering?

If you realise you should have registered as a deemed contractor but did not:

1. Register immediately.
2. Contact HMRC. Voluntary disclosure typically results in lower penalties than waiting to be caught.
3. Calculate the tax that should have been deducted from subcontractor payments, which you are liable for.
4. Pay it. HMRC may allow a Time to Pay arrangement if you cannot pay immediately.

If you failed to make deductions, you cannot recover the tax from subcontractors after the event. You must pay it yourself. This can be a significant unexpected cost.

Penalties for non-compliance

Failing to register and operate CIS correctly can result in:

• paying HMRC the tax that should have been deducted from subcontractors
• late filing penalties, starting at £100 for the first month and increasing over time
• interest on any tax paid late
• penalties for returns that contain errors

The tax liability alone can be significant. On £3 million of construction payments at the standard 20% rate, the undeducted tax would be £600,000.

Getting professional advice

Consider seeking advice from an accountant or tax adviser if:

• You are unsure whether your activities count as construction operations
• You have complex arrangements with multiple subcontractors
• You need to calculate your liability for periods when you should have been registered
• You want to set up compliant systems before exceeding the threshold

The cost of professional advice is typically much less than the penalties and tax liability for getting CIS wrong.