21 March 2021

Sudeep Ganguli, employment taxes senior manager at PSTAX, discusses the changes particularly those that will impact public bodies

In the March 2020 Budget, the government published a new consultation – Tackling construction industry abuse. Following the consultation, four of the five construction industry scheme (CIS) changes originally proposed were incorporated into the draft legislation and the relevant guidance was published on 12 November 2020. The four changes that will come into effect from April are summarised below but those regarding deemed contractors and materials will be of most relevance to public bodies.


CIS deductions claimed against PAYE

Her Majesty’s Revenue & Customs (HMRC) was aware that CIS deductions were being claimed:

  • by employers not working in the construction industry

  • by subcontractor employers that are not companies

that exceed the sums recorded as having been withheld for a particular subcontractor in contractor returns.

To prevent these claims a new provision is introduced from April 2021 to allow HMRC to correct the CIS deductions figure claimed in the subcontractor employer’s employer payment summary (EPS) return where there is no satisfactory supporting evidence. Interest and penalties will also be charged. Where HMRC amends the CIS credit claimed in an EPS, the employer may also be prevented from making further CIS set-offs in the same tax year.

Note that HMRC’s new powers to amend set-off claims and prevent further set-off claims will be decisions subject to review and appeal, unless the claimant is not a subcontractor company suffering deductions under the CIS.

This particular change is unlikely to have any significant impact upon public bodies which are ‘deemed contractors’.


...the employer may also be prevented from making further CIS set-offs...


Deemed contractors

Most public bodies are regarded as ‘deemed contractors’ for the purposes of the CIS and are required to operate the scheme where they spend more than an average of £1,000,000 per annum on construction operations taking the past three complete financial years into account.

The consultation document advised that there is a possibility of the deemed contractor rules being abused, because businesses that could be deemed contractors have changed their accounting periods or manipulated the amount or timing of CIS payments in order to avoid having to register. Therefore, the government stated that it intended to “simplify the current rule to ensure businesses spending above a certain amount on construction operations have to operate the CIS when the threshold is reached”.

Section 59 of Finance Act 2004 sets out the pre-April rules for bringing deemed contractors into the CIS, with the general rule to determine whether a non-construction business (including public bodies) must operate the scheme found at subsection (1)(l). This requires a turnover threshold for expenditure on construction operations to be met, and that the business reviews this expenditure at the end of each period of account. If average annual expenditure on construction operations exceeds £1,000,000 taking the last three years into account, the business must operate CIS on any construction expenditure from the start of the next period of account.

However, the new rules from April will require public bodies and other businesses to monitor construction expenditure more regularly on a rolling basis irrespective of accounting periods. Importantly, only when the cumulative spend on construction operations reaches a threshold of £3,000,000 over the past twelve months will the business have to register for CIS as a contractor (if not already registered) and begin operating CIS on its next payment made to a subcontractor for construction operations undertaken. Importantly, it will also mean that those already registered – including most public bodies – that fall below the new threshold will be able to de-register from the scheme.

The deemed contractor threshold increase was justified in the consultation on the basis that it would assist in eliminating the potential for abuse as fewer businesses would be above the threshold. Certainly, the large increase in the threshold will mean that several district and borough local authorities – as well as some police and fire bodies – will be able to deregister if they currently operate the scheme. This will apply when expenditure on construction operations falls below £3,000,000 within the previous twelve-month period, or when no further payments on construction operations are expected to be made under all construction contracts.

Notwithstanding the changes to the threshold, public bodies and other businesses will have to monitor expenditure on a monthly basis under the new rules so that, if not already doing so, they are ready to operate the schemes from the start of the next period of account where the rolling threshold is exceeded or, where applicable, they can de-register if below the threshold. Therefore, from April 2021, expenditure must be monitored on a monthly basis for all contractors (both within CIS and those not in CIS) to be able to make decisions on whether to de-register or register.

Whilst the main principles regarding the rules for determining whether deemed contractor status applies are generally understood, there are some important questions that we are waiting for clarification on from HMRC, including the following.

The guidance that accompanies the draft legislation refers to an ‘election’ to de-register. However, at the time of writing, we have no further details on the election process and understand that guidance will be made available soon. It is also noted with interest that businesses will have the option to remain within the scheme if they so wish. Presumably, some will see this as administratively more convenient.

The other area on which we urgently await HMRC clarification is in respect of what exactly counts towards the £3,000,000 threshold. The draft legislation is unclear as to whether this includes the cost of materials and VAT (value added tax) and we have asked HMRC to clarify the position as a matter of priority. This could have a significant impact on which bodies are required to register particularly considering the large increase in the threshold and the greater potential for more public bodies to fall outside the definition of deemed contractor.


...copies of invoices of the materials they have purchased ...


Deductions for materials

The consultation document stated that the rule for deductions for materials was “open to interpretation”. Therefore, in future a deduction for materials will only be possible where a subcontractor has “directly purchased materials used or to be used in fulfilling that contract”.

This will mean that no deduction will be available for materials bought by a subcontractor further down the supply chain. Again, we await HMRC guidance on how contractors will be expected to comply with this new rule including what evidence will be required, but it is thought that subcontractors may have to provide copies of invoices of the materials they have purchased to substantiate anything they are claiming as deductions on the invoices sent to contractors.


False registration penalty

There will be a new penalty for providing false information when registering for CIS. Within the definition of ‘relevant person’ to whom the penalty could apply, are: an agent, director, company secretary, or anyone else HMRC believes is able to exercise control and direction over the business/person making the application. This is unlikely to be an issue for public sector bodies.

There was a fifth consultation proposal regarding supply chains and how fraud could be avoided in such cases. Though this has not been taken forward at this time, it was mentioned that it may be considered again in the future.

It is thought that with the introduction of the VAT domestic reverse charge for construction services on 1 March 2021, it would be appropriate to allow businesses to become familiar with this new charge before consideration is given to the CIS supply chain proposals.



Whilst some of the details regarding the rule changes await further clarification, there is no doubt that these are some of the most significant developments regarding the CIS that have happened for many years affecting public bodies (and others). In particular, the rules regarding the definition of a deemed contractor will mean that some of these bodies will no longer have to operate the scheme; however, it should be noted that it does not remove the compliance obligation altogether as expenditure must still be monitored on a rolling basis. 


Featured in the April 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.