How the Construction Industry Scheme can impact a Property Investment Business

It is crucial for a business or individual to understand the differences between a property developer and a property investor when determining their responsibilities under the Construction Industry Scheme (CIS). Failure to operate the scheme correctly will leave a business/individual open to scrutiny from HMRC, resulting in HMRC seeking any under-deducted CIS tax and imposing penalties.

Property Developers

Property developers are ‘mainstream contractors’ for the purposes of CIS because their principal business activity is the creation/renovation of buildings or other civil engineering works. Therefore, property developers are required to register and operate CIS as soon as they engage subcontractors to carry out construction work.

Property Investor Business

A property investment business’ principal activity is the acquisition/disposal of buildings for capital gain or the holding of property for rental income and, therefore, its CIS position is less obvious. Special care must be taken to decide if or when the scheme applies.

If a property investment business simply purchases a property to hold as an investment or for rent and arranges for the property to undergo minor refurbishment before being ready for occupation, these activities will not be considered those of a mainstream contractor.

However, if its portfolio is substantial enough, it could fall within the definition of a ‘deemed contractor’. 

Deemed Contractor

A deemed contractor is a business that is not usually associated as being in the construction industry but can be treated as a contractor if its expenditure on construction operations exceeds the statutory limit.

Changes to the deemed contractor rules were introduced from 6 April 2021. The new rules now require a business to look back over the previous 12 months to check if its construction costs have exceeded the deemed limit (£3m) rather than reviewing the last 3 accounting periods to check if its construction operations expenditure exceeded the limit.

Ongoing review of construction work

Property investment businesses, now more than ever, need to monitor their construction operation costs regularly to establish whether or not they have exceeded this deemed limit.

Further difficulties can arise where a property investment business takes on a property that requires significant construction work or enters into multiple contracts relating to construction operations for the purposes of developing one or more of its properties. The business will need to consider if its nature of trade has changed from one of investment to one of development – if it has, then it will be a mainstream contractor for the period of these contracts.

Summary

Care must be taken to consider the impact of CIS on each project or contract a property investment business undertakes. Getting it wrong can have serious financial consequences should HMRC look to open a compliance enquiry and establish that CIS has not been operated correctly.

If there are questions over whether your business might be caught by the scheme or if you would like to raise anything we’ve discussed in this article, please contact us at info@guildhubservice.co.uk and talk to our expert team. We’re here to help.

GuildHUB is an information resource, provided free of charge by The Guild, for accounting professionals and their clients.  If you wish to contact The Guild, please email contact@trusttheguild.com.

The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.

BUSINESS ADVISORY
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Julia Clutterbuck
07/2021
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