The construction industry scheme was first set up in 1971 to improve tax compliance in the construction industry. The scheme relates to payments made by a contractor to a subcontractor in relation to construction operations. The scheme covers any work done to a permanent building, temporary structure or civil engineering installation.
Construction operations include site preparation, general building work, repairs and refurbishment, decorating and demolition. Some types of work such as landscaping are not normally regarded as construction work but would be included in the definition of construction operations if they were performed as part of a new housing development.
If a single contract covers various activities, some of which are construction operations and some of which are not, the whole contract will be regarded by HM Revenue and Customs (HMRC) as coming under the construction industry scheme. This will be the case even if the non-construction parts of the contract are invoiced separately.
The provision of services for workers on a construction site, or facilities for operating the site, is not a construction operation for the purposes of the construction industry scheme. So for example workers’ canteens, temporary offices for site workers, workers’ hostels and site security would not be covered by the construction industry scheme.
Businesses covered by the construction industry scheme
The construction industry scheme covers all businesses with construction activities including the self-employed, partnerships, companies or limited liability partnerships (LLPs). In addition to construction businesses it could also apply to property developers or to a staff bureau. A business based outside the UK could be covered by the construction industry scheme if it does work in the UK or within UK territorial waters.
A business whose primary function is not construction might come under the construction industry scheme if it does some construction work in addition to its primary activities. A business could be treated by HMRC as a “deemed contractor” if it spends more than £1 million per year on average over a three year period on construction activities. These provisions could apply to certain large businesses, or to organisations such as housing associations, local authorities, government departments or other public bodies.
The construction industry scheme does not apply to property investment businesses provided that they spend less than £1 million on construction operations in a year. The scheme also does not apply to private householders who have construction work done on their own property or have their own house built.
A charity does not need to apply the construction industry scheme when it makes payments for construction work, however the trading arm of a charity would be covered by the scheme in relation to any construction activities.
Operating the construction industry scheme
The construction industry scheme has been revised a number of times. The latest revisions to the scheme in April 2007 included the replacement of registration cards and tax certificates by a verification service and the introduction of a requirement for a monthly return to HMRC which replaced the need for vouchers.
Subcontractors must register with HMRC if they wish to obtain payment either gross or under deduction of 20% basic rate income tax. If a subcontractor is not registered with HMRC under the scheme, the contractor must make a tax deduction of 30% when making a payment to that subcontractor.
A subcontractor can apply to be paid gross, without deduction of tax, if the business satisfies the following conditions:
It is run in the UK and has a bank account; The construction turnover of the business is £300,000 or more per year; and The business has complied with all its tax obligations.
Subcontractors who do not satisfy the above conditions but are registered with HMRC will be paid by the contractor under deduction of 20% income tax. Any part of the payment that relates to a reimbursement of the cost of materials supplied by the subcontractor is excluded from the amount subject to deduction of income tax.
When signing a contract, the subcontractor must give to the contractor their name, unique taxpayer reference and national insurance number. The contractor should then verify the subcontractor’s status with HMRC by telephone or online. The contractor must provide a subcontractor from whom tax has been deducted with a statement within fourteen days of the end of each tax month setting out details of payments made and tax deducted.
Within the same time limit the contractor must send a return to HMRC setting out all the payments made to subcontractors during the month, including both payments made gross and those from which tax has been deducted. These returns can be made electronically. The tax deducted from the subcontractor must be paid over to HMRC by the contractor within fourteen days of the end of the tax month (or three days after this in the case of an electronic payment).
“Evaluating the Construction Industry Scheme: Report for HM Revenue and Customs”, Ipsos MORI, October 2010
HMRC website www.hmrc.gov.uk
“Taxation: Finance Act 2010” by Alan Melville, sixteenth edition, FT Prentice Hall 2011