How the Construction Industry Scheme can impact a Property Investment Business

27th Jan 2021
Brought to you by
The Guild Logo
Share this content

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

Property developers fall within the meaning of ‘mainstream contractors’ 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.

A property investor’s CIS position is less obvious, so special care must be taken to decide whether the CIS scheme applies. A property investment business’ principal activity is the acquisition/disposal of buildings for capital gain or the holding of property for rental income.

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, then these activities will not be considered those of a mainstream contractor.

However, if their estate is substantial enough, it could fall within the definition of a ‘deemed contractor’ if its expenditure on construction operations exceeds the statutory limit.  A deemed contractor is a business that is not usually associated as being in the construction industry but can be treated as a contractor where the business spends more than £1m per year on average over a three-year period on construction operations.

Changes to the deemed contractor rules are set to be introduced from 6 April 2021. The new rules will require a business to look back over the previous 12 months to check if their construction costs have exceeded the deemed limit (£3m). Therefore, from April 2021 property investment businesses will need to monitor their construction 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 whether its nature of trade has changed from one of investment to one of development - if it has, then it will become a mainstream contractor for the period of these contracts.

Therefore, care must be taken to consider the impact of CIS on each project a property investment business undertakes. Getting it wrong can have serious financial consequences.

If there are questions over whether your business might be caught by the scheme and you would like to discuss the matter further, please contact us.

The Guild