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The Construction Industry Scheme (CIS) is a set of special rules for handling payments made by contractors to subcontractors for construction work. Under the scheme, contractors need to make sure they pay their subcontractors in the correct way. They must also keep certain records and do certain paperwork - including giving statements to some of their subcontractors and making monthly returns to HM Revenue & Customs (HMRC).
HMRC may treat some large organisations, like public bodies, as contractors because they spend a substantial amount on construction work. This means they have to follow the CIS rules for contractors.
This guide explains what organisations like local authorities, government bodies and housing associations need to do if they become contractors under CIS.
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Under CIS a number of organisations are treated as contractors if they spend more than £1 million a year on 'construction operations'. They are often referred to as 'deemed contractors'. Deemed contractors have to follow most of the normal CIS rules for contractors whenever they pay for construction work that's covered by the scheme.
For example, a local authority might spend a considerable amount of money each year on building work and refurbishment of its housing stock.
An organisation becomes a deemed contractor under CIS rules if:
Once an organisation becomes a deemed contractor, it'll stay one until it can show HMRC that its spending on construction operations was less than £1 million a year for three years in a row. If HMRC is satisfied that this is the case, it will deregister it as a deemed contractor.
As a general rule, the scheme covers almost any work done in the UK to a building, structure, civil engineering work or installation. Some examples include:
Some types of work may be covered by CIS only if they're done as part of an ongoing construction contract. For example, cleaning services aren't normally treated as construction operations - but they are if they're done specially in preparation for painting and decorating.
To find out more, read HMRC's related guide 'Is your work within CIS?'. You'll also find a list of the types of work that are classed as construction operations under CIS in HMRC's booklet CIS340 'Construction Industry Scheme - guide for contractors and subcontractors'.
CIS rules list the organisations - and types of organisation - that can become deemed contractors under CIS. They include:
You can see a full list of public and other specified bodies that can become contractors in HMRC's CIS Manual.
The CIS definition of a local authority includes organisations like:
As with most other organisations, HMRC treat them as CIS contractors if they spend enough on construction operations. In practice, this means that most larger local authorities are CIS contractors and have to follow the CIS rules.
All government departments - and their agencies - throughout the UK have to follow the CIS rules for contractors if they spend enough each year on construction operations. In practice, this means that most government departments are CIS contractors.
As with government departments, NHS trusts that spend more than a certain amount each year on construction work are deemed contractors under CIS.
Payments for construction work by the head teacher or governing body of a maintained school on behalf of the local education authority aren't covered by CIS. So maintained schools don't become deemed contractors no matter how much they spend. Voluntary aided schools aren't treated as CIS contractors either.
HMRC treat private schools in the same way as any other business that can become a deemed contractor. If they spend enough on construction work each year then they have to follow the CIS rules for contractors.
Any business or organisation can be a subcontractor as a well as a contractor under CIS.
HMRC treat local authorities and certain other public bodies as subcontractors when they carry out construction operations for others. They don't have to register as a subcontractor with HMRC, but they're treated as having 'gross payment status'. This means that contractors can pay them for construction work covered by the scheme without making any deductions from their payments.
CIS rules list the organisations that are treated as subcontractors with gross payment status. As well as local authorities, they include:
If one of the above bodies sets up its own direct labour organisation or - direct service organisation - to do construction work, then HMRC will still treat it as having gross payment status if it remains part of the local authority. But if it becomes a separate company, it'll need to register with HMRC as a subcontractor and apply for gross payment status to be able to keep getting gross payments.
Similarly, if any public body is privatised then it'll have to apply for gross payment status to continue being paid gross.
PFI is a form of Public Private Partnership, aimed at enabling the public and private sectors to work more closely together when providing public sector infrastructure and services.
Payments made by a public body under a PFI arrangement are specifically excluded from the Construction Industry Scheme and the Scheme must not be applied to such payments. This exception only applies to the payment made by a public body to the Private Finance Initiative (PFI) contractor. A PFI contractor is usually a group (often consisting of construction and non-construction parties) put together for the particular project and commonly referred to as a 'Special Purpose Vehicle' (SPV).
Where the exception applies to a payment by a public body, this removes the need for the SPV to register for CIS, as a subcontractor. It also removes the need for the public body to operate CIS on payments which might continue under the contract for 25 or 30 years.
However, once the payment is in the hands of the SPV, any payments which are then made by the SPV under contracts relating to construction operations will fall within CIS. The SPV therefore needs to be registered in CIS, as a contractor, before making these payments.
Other contractors who receive payments from the SPV under construction contracts should operate CIS on the onward payments to their own subcontractors.