When you hear the words Construction Industry Scheme (CIS), what comes to mind?
Building sites? Bricklayers? Groundworkers? Hard hats and scaffolding?
Probably not a home improvements business selling new kitchens, bathrooms or replacement windows to homeowners.
But CIS can apply in some less obvious situations, and businesses that supply and arrange the installation of home improvements can potentially find themselves within the regime.
Here’s a simple example.
The home improvements business
Imagine a home improvements business sells a customer a new bathroom, kitchen, replacement windows or another fitted product for their home.
The package includes the products and installation. The customer pays the home improvements company for the complete job.
The company doesn't employ all of its own installation team. Instead, it engages self-employed tradespeople or fitting teams to carry out the work and pays them once the job is completed.
It might look something like this:
Homeowner → pays Home Improvements Company → pays Self-Employed Fitter
The work is taking place in someone's private home rather than on a conventional building site.
So CIS doesn't apply… right?
Not necessarily.
Home improvements can be construction operations
CIS covers a much wider range of work than many businesses realise.
Take bathrooms as one example. HMRC's own Construction Industry Scheme Manual specifically identifies the installation of fitted bathrooms as work that falls within CIS.
At CISR14150, HMRC discusses the installation of fixed furniture and lists fitted kitchens, fitted bedroom furniture and fitted bathrooms as examples that can fall within the scheme.
Other common home improvement work can also constitute construction operations. Depending on the particular job, this can include plumbing, electrical work, joinery, tiling, alterations and the installation of various fixtures and fittings.
So a business doesn't necessarily need to be building houses or operating on commercial building sites to be involved in construction operations for CIS purposes.
But that's only half of the story.
“But our customers are homeowners”
This is where the contractual arrangement becomes important.
A private householder having construction work carried out on their own home is not normally treated as a CIS contractor. HMRC confirms this at CISR12030.
So if Mrs Jones buys a kitchen from a supplier and then separately finds, engages and pays Joe the self-employed kitchen fitter, Mrs Jones doesn't suddenly need to register for CIS and start making deductions from Joe.
But change the arrangement slightly:
Home Improvements Company contracts with Mrs Jones to supply and install the kitchen.
Mrs Jones pays the Home Improvements Company.
Home Improvements Company engages Joe to carry out the installation and pays him for the work.
Now we have a commercial business engaging another party to carry out construction operations on its behalf.
That's a very different CIS question.
The fact that the construction work ultimately takes place in a private home doesn't automatically exempt the commercial relationship between the home improvements company and its subcontractor.
“We’re a home improvements company, not a construction company”
This is perhaps the more interesting point.
A business might describe itself as a retailer, showroom, window company, kitchen company, bathroom specialist or simply a home improvements business.
Construction may not be the first word its owners would use to describe what the company does.
But CIS isn't determined by the label on the shop door.
HMRC's guidance at CISR12050 considers the distinction between mainstream and deemed contractors. It says that whether a business is a mainstream or deemed contractor depends upon the extent to which its business involves construction work.
Where a business routinely undertakes construction operations as part of carrying on its business, HMRC says it is likely to be a mainstream contractor.
HMRC also explains at CISR16040 that the definition can include businesses whose activities involve executing or arranging for construction operations.
That can be highly relevant to a home improvements business selling an installed product.
What about the £3 million CIS threshold?
This is another area where businesses can get caught out.
You may have heard that a business only becomes subject to CIS once it spends more than £3 million on construction operations over a rolling 12-month period.
There is such a threshold, but it doesn't apply in quite the way people sometimes assume.
The £3 million test is relevant to deemed contractors.
Broadly, these are businesses that aren't otherwise carrying on construction operations but incur sufficiently significant expenditure on construction that the CIS rules bring them within the contractor regime.
For example, a large non-construction business undertaking substantial expenditure on its own premises might become a deemed contractor.
But that's different from a business that routinely undertakes or arranges construction operations as part of the service it sells to its customers.
If supplying and installing kitchens, bathrooms, windows or other home improvements is part of the company's ordinary business, there is a risk that it is a mainstream contractor, rather than a non-construction business waiting to cross the £3 million deemed-contractor threshold.
In other words:
“We don't spend £3 million a year on fitting” isn't necessarily the answer.
Supply only versus supply and fit
A useful starting point is therefore to look at exactly what is being sold and, importantly, who is contracting with whom.
Consider these two scenarios.
Scenario 1 – Supply only
The home improvements business sells Mrs Jones a new kitchen.
Mrs Jones separately chooses a fitter, contracts with that fitter and pays the fitter directly.
The home improvements business isn't engaging the fitter to undertake construction operations.
Scenario 2 – Supply and fit
The home improvements business quotes Mrs Jones £15,000 to supply and install her new kitchen.
Mrs Jones contracts with and pays the home improvements business.
The company then engages a self-employed fitting team and pays them £4,000 to complete the installation.
The second scenario creates a very different CIS position. The home improvements business may be acting as the contractor and the fitting team as its subcontractor.
The same principle can potentially arise with bathrooms, kitchens, windows, doors and other installed home improvement products.
What would the home improvements company need to do?
Where the arrangement falls within CIS, the contractor has a number of obligations.
These can include registering as a CIS contractor, verifying new subcontractors with HMRC, establishing the appropriate deduction status and submitting monthly CIS returns.
Depending on the subcontractor's status, payments may be made:
gross, where the subcontractor holds gross payment status;
subject to a 20% CIS deduction for a registered subcontractor; or
subject to a 30% deduction where the subcontractor cannot be successfully verified.
There are also specific rules around what elements of a subcontractor's invoice are subject to deduction, so it isn't necessarily as simple as deducting 20% from the total invoice.
What if we've never operated CIS?
This is where it's worth getting advice rather than simply registering from tomorrow and hoping for the best.
If a home improvements business has been operating a supply-and-fit model for some time and paying self-employed installation teams without considering CIS, there could potentially be a historic compliance issue.
The first step should be to establish the facts.
What does the customer contract say? Who is responsible for installation? Who contracts with the fitter? Who pays them? What exactly does the fitter invoice for? How long has the arrangement operated?
Those answers help establish whether CIS should have been operated and, if so, the potential historic position and the appropriate way of dealing with it.
There can also be a separate question over whether someone described as a “self-employed fitter” is genuinely self-employed for tax purposes. CIS doesn't turn an employee into a subcontractor, so employment status should be considered separately where appropriate.
CIS isn't just about building sites
That's perhaps the broader lesson.
The Construction Industry Scheme isn't restricted to businesses with “construction” in their name or people working on large commercial developments.
If your business sells home improvements together with installation, and you engage self-employed tradespeople to carry out that installation, it's worth asking whether you have inadvertently stepped into CIS.
Kitchens and bathrooms are particularly useful examples because HMRC's own guidance specifically refers to their installation.
And if you've been relying on the £3 million threshold, it's worth checking whether that threshold actually applies to you.
Sometimes the important question isn't:
“Are we a construction company?”
It's:
“Are we contracting with someone else to carry out construction operations as part of what we've promised our customer?”
Those two questions can produce very different answers.
This article provides general information only and should not be treated as advice on the CIS treatment of a particular arrangement. The contractual and factual position should be considered in each case.
HMRC references: Construction Industry Scheme Manual CISR12030, CISR12050, CISR14020, CISR14150 and CISR16040.
