UK: Construction Industry Scheme: Could you be a contractor?

Last Updated: 12 August 2005
Article by Dominic Haslam

The Inland Revenue is to increase substantially the number of reviews it conducts into the employment status of construction workers. Yet it is not just the construction industry that is affected by the news. Dominic Haslam explains why all companies spending on ‘construction operations’ need to check whether they are affected by the Construction Industry Scheme and what their obligations might be.

In August 2004, the construction industry came under the spotlight as the Inland Revenue launched an initiative to review employment status within the industry. Over 55,000 letters were sent out to contractors and subcontractors, where the Inland Revenue had reason to doubt that a subcontractor’s employment status had been correctly determined. The Inland Revenue’s letter to contractors reminded them of their responsibility to determine whether an individual should be treated as an employee.

Are you a contractor?

Many businesses mistakenly assume that the Construction Industry Scheme (CIS), introduced by the Inland Revenue to counter tax evasion in the construction industry, does not apply to them and that the Inland Revenue’s recent initiative will not affect them. All businesses in the construction industry that pay subcontractors for construction operations are classified as contractors. Furthermore, organisations who do not generally operate in the construction industry are brought within the CIS as "deemed" contractors, where their annual average expenditure on "construction operations" exceeds £1 million per year over the last three years, ending with their last accounting date.

The definition of "construction operations" is reasonably wide and includes not only conventional construction, but may also include work such as painting and decorating and the installation of computer and IT systems. A comprehensive list of construction operations included or excluded from the CIS can be found in the CIS booklet IR 14/15(CIS) in Appendix B.

Obligations of employers/contractors

A common theme of PAYE, NIC and CIS legislation is that it places the obligations (and penalties) on the engaging party i.e. a business which takes on individuals to work on its behalf or a contractor where two parties contract for construction work. The first consideration for any business engaging an individual to undertake construction operations (irrespective of whether the business usually operates in the construction industry) is to determine that individual’s employment status correctly. If the individual is an employee, he should be paid through the payroll to account for PAYE and Class 1 NIC and the provisions of the CIS will not be relevant. Where an individual who is a subcontractor is genuinely self-employed, the CIS will apply.

However, defining an individual’s employment status correctly can be problematic. Certainly the possession of a CIS4 Registration Card or CIS6 Certificate by a subcontractor is no guarantee that the individual can be treated as self-employed. There is no statutory definition of what constitutes an "employee" and it has been left to the courts and employment tribunals to come to decisions as to the factors which are required for an employment relationship to exist. The Inland Revenue tends to place emphasis on the contractual relationship between the parties, which will generally provide the starting point when determining an individual’s employment status. The Inland Revenue will also examine the reality of the working practices of the individual, as this may differ from the provisions of the contract.

There is no single test for determining employment status, but the important considerations should be familiar to most businesses. Does your organisation have control over how and where the individual works? Can the individual provide a substitute to work in his place? Does the individual bear a genuine financial risk from the engagement? Does a mutuality of obligation exist between the parties? These and other factors will establish whether an employment relationship exists. If the answers to these questions do not give a clear indication that the individual is properly self-employed, there is a risk. Given the Inland Revenue’s recent pronouncements, any organisation that engages a significant number of self-employed individuals, particularly if it is also subject to the CIS, should review its working arrangements.

It is the responsibility of each business to determine the correct employment status of individuals it engages. Should an individual be incorrectly treated as self-employed, the engaging party is liable to pay the PAYE and Class 1 NIC that should have been deducted initially, plus any interest that may have accrued. In addition, a penalty for incorrect classification may also be due.

Employer Compliance Reviews

The Inland Revenue has recently announced that it is to increase the number of Employer Compliance Reviews of construction firms to almost twice the current number. It is clear that during the reviews, the level of adherence to the obligations of the CIS scheme and correct classification of employment status will be scrutinised more closely than businesses may have experienced in the past.


With the increased vigilance of the Inland Revenue, it is essential that both mainstream construction firms and "deemed" contractors review the current employment status of their subcontractors. Those with concerns regarding this issue should take steps to review the contractual documentation and working practices they have with those subcontractors.

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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