UK: Review of the Construction Industry Scheme- Does it Address Landlords and Tenants´ Concens?

Last Updated: 21 January 2003

Article by Maria Edsall


The Construction Industry Scheme ("CIS") is a tax deduction scheme designed to prevent tax avoidance in the construction industry by engaging workers on a "cash in hand" basis. It can also apply to payments between landlords and tenants by way of contributions towards the other party’s works on the property. This aspect of the CIS is not well-known and creates an unnecessary administrative burden for many in the property industry.

The Inland Revenue is currently reviewing the operation of the CIS with a view to reducing the regulatory burden of the CIS on construction businesses. The review does not address the major concern of the wider property industry - the application of the CIS to payments between landlords and tenants.

With the consultation process still in progress, the property industry has the opportunity to express its concerns over the scope of the CIS to the Government. The best way forward would seem to be a special exemption from the CIS for payments made between landlords and tenants.

How the CIS operates

The CIS applies to payments made under contracts relating to "Construction Operations" where the party making the payment is treated as a "Contractor" and the party receiving the payment is a "Sub-Contractor" under the CIS. A Contractor cannot make any payments to a Sub-Contractor in respect of Construction Operations unless the Sub-Contractor produces a valid CIS registration document. Where a Sub-Contractor holds a Registration Card, the Contractor must make a deduction from the payment on account of the Sub-Contractor’s tax liability.


The term "Contractor" is defined widely and, broadly, includes any person carrying on a business which includes Construction Operations (for example, property developers) and non-construction businesses that have spent on average over £1 million a year on Construction Operations in the last three years. This means that many businesses outside the mainstream construction industry (for example, large retailers or landlords) can be treated as Contractors.


A "Sub-Contractor" under the CIS is any person who is under a duty to a Contractor to carry out Construction Operations or is in any way answerable to the Contractor in respect of such Operations.

Broadly, there are two types of registration documents - Registration Cards and Certificates.

A Contractor making a payment to a Sub-Contractor holding a Registration Card must make a deduction from the payment on account of the Sub-Contractor’s tax liability. The rate of deduction is currently 18 per cent. of such part of the payment as does not directly represent the cost of materials. Sub-Contractors holding Certificates can be paid gross, without having to make a CIS deduction.

The qualifying criteria for a Certificate are such that most businesses do not qualify for a Certificate and are issued with a Registration Card.

Construction Operations

The term "Construction Operations" is very widely defined and includes repair, dismantling of buildings, installation of air-conditioning, heating and lighting, decorating and so on.

Operation of the CIS in the construction industry - example

A property developer makes a payment to a building firm to carry out certain construction works on its site. The developer will be treated as a "Contractor" under the CIS by virtue of it carrying on a business that includes Construction Operations. The building firm is under an obligation to a Contractor to carry out Construction Operations. Therefore, CIS will apply to any payments made by the developer to the building firm. Consequently, the developer must be registered as a Contractor under the CIS and must check that the building firm holds a valid CIS registration document. If the building firm holds a Registration Card the developer must make a deduction from the payment to the building firm.

Implications of the CIS for landlords and tenants

Large landlords and tenants, whatever their business, are treated as Contractors under the CIS if they have spent on average over £1 million a year on Construction Operations in the last three years. This means that they must be registered as Contractors and must comply with certain record keeping and filing requirements. Further, they cannot make any payments to building firms carrying out Construction Operations for them unless the latter hold a valid CIS Certificate or a Registration Card and make the necessary deductions where appropriate.

A further implication of the CIS which is sometimes overlooked is its application to payments made between landlords and tenants. In particular, the CIS can apply where a landlord who is a Contractor makes a contribution towards the works that a tenant (technically, a Sub-Contractor for these purposes) agrees to carry out on the property (or indeed the other way around). The application of the CIS to such payments means that both parties have to be registered under the CIS - one as a Contractor and the other as a Sub-Contractor, and comply with certain record-keeping, information filing and other requirements which creates an unnecessary burden for both landlords and tenants.

Application of the CIS to payments under a lease - example

A large landlord enters into an agreement for lease with a prospective tenant. The agreement provides that the tenant will carry out certain fit-out works on the property and that the landlord will make a contribution towards such works.

If the landlord has spent over £1 million a year on Construction Operations in the last three years it is a Contractor under the CIS and must be registered as such with the Inland Revenue.

The tenant is under a duty to a Contractor to carry out Construction Operations and is therefore a Sub-Contractor. The agreement between the landlord and the tenant relates to Construction Operations. Therefore, CIS will apply to the contribution. The tenant must register as a Sub-Contractor under the CIS. Most businesses do not qualify for a Certificate and therefore it is likely that the tenant will be issued with a Registration Card.

The landlord will have to make a deduction of 18 per cent. from the payment made to the tenant (except for such part as directly represents cost of materials) on account of the tenant’s tax liability. The tenant will be able to set-off the amount so deducted against its tax liability.

The review of the CIS

One of principal aims of the proposed reforms is the reduction in the regulatory burden of the CIS. The consultation document discusses the following most significant changes:-

1. Abolition of the registration documents (Certificates and Registration Cards). They will be replaced with a verification process - a Contractor will be able to contact the Revenue and check the registration status of any Sub-Contractor. This should result in the reduction of some of the Sub-Contractors’ costs as they will no longer have to travel to present their registration documents to Contractors in person. However, this will also result in the increase of the compliance burden on Contractors. Contractors will be obliged to check each Sub-Contractor’s registration status by making enquiries of the Revenue instead of simply checking registration documents presented to them by Sub-Contractors.

2. Contractors will be required to certify that they have checked the employment status of each Sub-Contractor they are engaging. As under the current rules, where a Sub-Contractor employed by a Contractor, PAYE should be operated in the normal way rather than the CIS deductions. Under the proposed new rules, Contractors will be required to make declarations to this effect and there will be a penalty regime for false declarations.

3. The current vouchers system will be replaced with periodic returns. This should reduced the amount of paperwork involved and make the CIS easier to operate.

4. Sub-Contractors will be able to register on-line. This should make it easier for Sub-Contractors to get registered.

5. The Inland Revenue will introduce a new computer system which should enable Contractors to submit returns via the internet and support the new verification service.

Overall, the proposed reforms should result in a reduction in the amount of paperwork that construction businesses have to deal with, although some of the regulatory burden will be effectively shifted from Sub-Contractors to Contractors.

Reform does not address a key concern of landlords and tenants

The proposals fail to address the application of the CIS to payments between landlords and tenants. Given that the main purpose of the CIS is to prevent tax avoidance in the construction industry, there is no reason to preserve this "side-effect" of the CIS.

Now that the CIS is under review, the property industry has the opportunity to lobby the government to introduce a special exemption from the CIS for payments made between landlords and tenants.

A consultation document “The Inland Revenue and the Construction Industry; Working Together for a New Scheme” (which can be seen at sets out the Revenue’s proposals for the reform of the CIS. The deadline for comments to the Inland Revenue is 28 February 2003.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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