If your property business pays subcontractors or spends substantially on construction, don’t risk hefty penalties. Make sure you are compliant and register with HMRC.
Property developers may be liable to register as a contractor under the Construction Industry Scheme (CIS). This includes having to verify payments being made to people you hire to undertake work for you, such as plumbers, builders and carpenters as sub-contractors.
Does my business qualify?
- If your business involves using other people’s labour to carry out building work HMRC may see you as a contractor who must take part in the scheme.
- This includes all individuals, partnerships and limited companies.
- Property developers are defined as ‘creators of new buildings, renovations or conversions to existing buildings, or other civil engineering works’.
- Almost all property developers use the services of independent tradespeople such as bricklayers, carpenters, painters, electricians, and plasterers, and so on. So almost all of them will be “contractors”.
The scheme was introduced by HMRC to combat tax evasion in the construction industry. In the past subcontractor’s cash payments would not necessarily be reflected on individuals tax returns. Under the requirements of the scheme the contractor must make deductions and submit them to HMRC.
A Detailed Example
John is a property developer, who owns a plot of land with planning permission to build a house and sell it. John is deemed to be a ‘contractor’ for CIS purposes and therefore must register.
John talks to Greg the builder – they agree a price for Greg to build the house. Prior to paying Greg, it is John’s responsibility to verify Greg, as a sub-contractor. John must ask to see Greg’s CIS documents (Company/Personal name, Company/Personal UTR, NI, Company registration number).
The verification process can be done via HMRC’s CIS online software and will advise John on what tax to deduct when paying Greg:
- 20% – Subcontractor has registered under CIS
- 30% – Subcontractor has not registered under CIS
- 0% – Subcontractor has registered under gross status, which means they will receive payments gross and pay tax at the end of the tax year.
John will be required to submit the CIS returns to HMRC by the 19th every month following the last tax month.
The scenario for investment properties and buy to let landlords can be different and may only be considered for CIS where significant works are being carried out. The normal rule of thumb per HMRC, is where you spend an average of £1 million a year on construction in any 3 year period.