CISR12080 - The Scheme: contractors: property developers and property investment businesses

Property developers

Property developers are included within the meaning of mainstream contractors because their business activity is the creation of new buildings, or the renovation or conversion of existing buildings, or other civil engineering works. The same is true of a speculative builder.

Property investment businesses

A ‘property investment business’ is not the same thing as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental; it need not be involved in the construction, alteration, or extension of buildings. Even so, if its property estate is substantial enough, its expenditure on construction operations on refurbishment or general maintenance may well cause it to fall within the meaning of a ‘deemed contractor’ (see CISR12050).

If its activities include the construction of an entirely new property or a redevelopment of a property, leading to change in its nature of use, for instance redeveloping an old hotel or offices into a block of flats, then that part of its activities will amount to property development, and it will be immediately within the scope of CIS as a mainstream contractor. This will apply even if the value or size of the property being developed is relatively small in relation to the rest of the property investor’s portfolio of properties.

Example

A property investment business acquires several properties which it intends to let, but before letting, refurbishment is required to bring the properties up to a suitable standard. In some instances, it can be more than the usual refurbishment, which is needed, for example a sprinkler or fire system or perhaps a structural survey identifies a new roof is necessary or works to comply with statutory requirements for health and safety or building regulations.

For CIS purposes we would see this as the normal activities of a property investor. Where, however, the expenditure on such activities exceeds £3million in a rolling 12-month period then the threshold for deemed contractor status has been reached and CIS applies.

Where the property investment business undertakes multiple or substantial contracts relating to construction operations for the purposes of development of one or more properties, you will need to decide if the nature of that business has now changed from “property investor” to “property developer”. In this case they would now be considered as mainstream contractors as the nature of their business has changed.

Example

The property investment business acquires a large, dilapidated building to add to its portfolio, and decides to convert the building into a series of flats which it will then individually let out. As a result, substantial development is required to the property to change the building to its new use. In respect of this type of development we would regard the property investment business as having taken on the mantle of a mainstream contractor as its business activity is now that of construction operations.

Where, at a future date, the investment business reverts to property investment activities only, then their status as a deemed contractor should be applicable once again. If their expenditure is likely to remain below £3 million on a rolling 12-month period, then deregistration from CIS may be considered appropriate.

However, where further property development is likely to be undertaken in the future, it may be more appropriate for the business to remain registered for CIS. Where property development appears to be a regular and substantial activity of any business purporting to be a property investment business, then they are likely to be a property developer and therefore a mainstream contractor within CIS.

Guidance Referral Service:

It is important that a business decides its CIS status before making payments to which the CIS could apply. If you are in doubt as to whether the work you are undertaking is that of a developer or an investor, you may call the CIS helpline on 0300 200 3210 and request to speak with a technician. The technician will provide you with a dedicated drop box link where you’ll be able to submit any information you want HMRC to review and provide advice on.

Please note, any view provided by HMRC is in line with HMRC’s general policy on providing advice to taxpayers. The responsibility lies with the taxpayer to supply HMRC with all relevant facts and inform HMRC if those facts have materially changed. Further guidance can be found at https://www.gov.uk/guidance/when-you-can-rely-on-information-or-advice-provided-by-hm-revenue-and-customs.