{"id":8874,"date":"2021-04-26T10:10:51","date_gmt":"2021-04-26T09:10:51","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=8874"},"modified":"2026-07-09T15:30:04","modified_gmt":"2026-07-09T14:30:04","slug":"construction-industry-scheme-rule-changes","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/construction-industry-scheme-rule-changes\/","title":{"rendered":"Construction Industry Scheme: What the CIS rule changes mean for you"},"content":{"rendered":"
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\n\t\t\t\t\t\t\tMoney Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t
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\n\t\t\t\t\t\tConstruction Industry Scheme: What the CIS rule changes mean for you\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

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\n\t\t\t\n\t\t\t\t\"\"\t\t\t\tKeir Thomas-Bryant<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

From the perspective of tax and legislative compliance, 2021 has already been a busy year<\/a>.<\/p>\n\n\n\n

But the added burden of Brexit<\/a> red tape and coronavirus financial support measures have created a perfect storm of business adjustments.<\/p>\n\n\n\n

Those businesses that operate under the Construction Industry Scheme (CIS) were already braced for the March 2021 introduction of the domestic reverse charge for VAT<\/a>, which alters the way contractors and subcontractors report and pay VAT.<\/p>\n\n\n\n

But the government also introduced a handful of changes to the CIS on 6 April 2021.<\/p>\n\n\n\n

All are intended to stop what HMRC refers to as abuse of the CIS, which is where businesses either make false declarations to HMRC, or make mistakes. As a result, businesses gain a tax advantage that isn’t correct.<\/p>\n\n\n\n

Below, we take a look at the four CIS measures that were put into place:<\/p>\n\n\n\n

1. Sub-contractor companies that are also employers<\/a><\/p>\n\n\n\n

2. When non-construction businesses are deemed contractors<\/a><\/p>\n\n\n\n

3. Deductions for materials in sub-contractor tax deductions<\/a><\/p>\n\n\n\n

4. False registration penalty under the CIS<\/a><\/p>\n\n\n\n

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Download your free Tackling the Construction Industry Scheme guide and learn about the VAT reverse charge for construction, which came into force on 1 March 2021<\/a><\/div>\n<\/div>\n\n\n\n

1. Sub-contractor companies that are also employers<\/h2>\n\n\n\n

If a sub-contractor under the CIS<\/a> is a limited company with employees used for the work, and have CIS deductions made by contractors from payments received for construction<\/a> work, they are entitled to set-off deductions against their employer liabilities.<\/p>\n\n\n\n

This is done via their payroll software: they send HMRC an Employer Payment Summary<\/a> (EPS) return, which is completed through the Real-Time Information (RTI) system.<\/p>\n\n\n\n

The intention is to ease cash flow for limited companies suffering deductions under CIS, and the set-offs occur in-year rather than at payroll year end. HMRC refers to this allowance and process as CIS set-off.<\/p>\n\n\n\n

What changed and what you need to know and do<\/h3>\n\n\n\n

Unfortunately, the CIS set-off is used incorrectly by employers not working in construction, or sub-contractors that are not limited companies.<\/p>\n\n\n\n

The claims also sometimes exceed the sums recorded as having been withheld for a particular sub-contractor on contractor returns.<\/p>\n\n\n\n

To stop this happening, HMRC implemented a solution. It’s one that could have serious repercussions for any business that uses CIS set-off.<\/p>\n\n\n\n

Since 6 April 2021, HMRC can correct the amount of CIS deductions claimed on a sub-contractor employer’s return where HMRC identifies or suspects inaccurate amounts have been claimed.<\/p>\n\n\n\n

This will only happen if, after HMRC challenges you, you can’t provide satisfactory evidence that you’re using the CIS set-off correctly, and only if you refuse to make the corrections yourself.<\/p>\n\n\n\n

HMRC also has the power as part of these measures to prevent the employer from setting further CIS deductions against their employer liabilities for the rest of the same tax year once the correction power has been used.<\/p>\n\n\n\n

You’ll be able to appeal against this in the form of a review, but it’s not yet clear how.<\/p>\n\n\n\n

As for actions you should take if HMRC’s remedial actions happen to you and you agree with them, any changes to the EPS will subsequently require reflecting in your bookkeeping application.<\/p>\n\n\n\n

However, this could be done manually via a journal entry.<\/p>\n\n\n\n

2. When non-construction businesses are deemed contractors<\/h2>\n\n\n\n

Some businesses outside the mainstream construction industry regularly carry out or commission construction work.<\/p>\n\n\n\n

In the language of the CIS, these businesses are commonly known as deemed contractors.<\/p>\n\n\n\n

They must switch to operating inside the CIS for construction operations if their average expenditure on construction operations is more than \u00a31m each year in any three year period.<\/p>\n\n\n\n

Conversely, should annual expenditure drop below \u00a31m in each of three successive years, the business ceases to be considered a deemed contractor for expenditure on construction.<\/p>\n\n\n\n

What changed and what you need to know and do<\/h3>\n\n\n\n

Unfortunately, some deemed contractors become creative with their accounting to try and avoid hitting that \u00a31m-plus threshold each year.<\/p>\n\n\n\n

They might deliberately incorrectly account for the work value, or adjust the timing of when it’s supposed to have happened.<\/p>\n\n\n\n

Some go so far as to even adjust their accounting periods to ensure they don’t meet the threshold.<\/p>\n\n\n\n

In response, since 6 April 2021, the new rules make it clearer and simpler to identify when a business is classes as a deemed supplier \u2013 and so much follow the CIS rules.<\/p>\n\n\n\n

This now occurs when the cumulative expenditure on construction operations exceeds \u00a33m within the previous 12 month period.<\/p>\n\n\n\n

Once this happens, you have to use CIS on your next payment to a sub-contractor for work that falls within the CIS.<\/p>\n\n\n\n

The key change is that this is a ‘rolling’ 12 month period \u2013 so changing year-end dates and suchlike will not be effective in escaping the scope of the CIS.<\/p>\n\n\n\n

To stop being considered a deemed contractor, your expenditure on construction operations needs to fall below \u00a33m within the previous 12 month period.<\/p>\n\n\n\n

Alternatively, you’ll no longer be considered a deemed contractor if you make (or expect to make) no further payments on construction operations (including retention or management\/administration payments) under any construction contract.<\/p>\n\n\n\n

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Download your free Tackling the Construction Industry Scheme guide and learn about the VAT reverse charge for construction, which came into force on 1 March 2021<\/a><\/div>\n<\/div>\n\n\n\n

3. Deductions for materials in sub-contractor tax deductions<\/h2>\n\n\n\n

A basic tenet of the CIS is that, before calculating and applying the tax deduction, contractors can deduct the cost of materials that the sub-contractor has purchased.<\/p>\n\n\n\n

Of course, these are only allowed if they were needed to complete the construction contract in question.<\/p>\n\n\n\n

What changed and what you need to know and do<\/h3>\n\n\n\n

As simple as this rule seems, it was always open to interpretation.<\/p>\n\n\n\n

For example:<\/p>\n\n\n\n