Whether certain contractual arrangements are caught for construction industry scheme (CIS) purposes can lead to confusion and potentially non-compliance.
The question of whether or not CIS applies and who is responsible for operating CIS will be determined by:
- Whether or not the contract is within the meaning of a construction contract; and
- the parties to the contract.
Whilst the CIS will be in point depending on whether or not the contract falls within the meaning of a construction contract, CIS need only be operated at the point of payment.
A construction contract is defined as any contract (whether written or verbal) which relates to construction operations and where one party is a contractor (FA 2004 s 59) and the other party is a subcontractor (FA 2004 s 58).
The key part of the legislation is the word ‘relates’. A contract only needs to relate to works/services that fall within the meaning of construction operations for that contract to be within CIS. This would be the case even if those works/services are not actually undertaken.
There are various types of contracts under which maintenance services can be provide, for example facilities management contracts or planned, preventive maintenance (PPM) contracts etc. These types of contracts can cover all manner of works, some of which might be within CIS and some outside.
As a consequence, it is vitally important to understand what types of works could be undertaken under this type of contract and having considered the position, if any part of those works would be within the meaning of construction operation, then all of the works or services provided under that contract will be within CIS.
The difficulty is that under maintenance contracts, the majority of the works might well be outside the scope of CIS. However, when carrying out those works if remedial works or making good is required then the remedial works or making good will drag the whole contract into CIS.
Generally, the installation of a domestic heating boiler would be regarded as being outside CIS on the basis that the central heating boiler is part of a system of heating. However, the installation of a new boiler may require changes to the building in which it is to be located, for example boring a new hole for the flue if the existing flue cannot be used.
The boring of a new hole through the wall and the making good of the existing hole left by the former flue, will drag the whole of the installation into the CIS. As a consequence, all of the works under that contract will be caught for CIS purposes from day one, even where a new boiler may never be installed or might be installed at some point in the future.
Private home refurbishments
There is a misconception that CIS does not apply to works carried out to private homes. As with all things CIS, this is not quite correct.
A private householder is not regarded to be a contractor for the purposes of the CIS and this only applies where the private householder has contracted for works to be undertaken to their own home and not properties that they may own and let/rent out.
As such, where a private householder has engaged a builder to carry out work to their own home, CIS does not apply. However, if that builder then subcontracts work out to other companies or tradesmen (eg bricklayers, electricians, plumbers etc), then that builder must operate CIS regardless of the fact that the works are being undertaken on a private home.
This is because the builder is a contractor and the contract between the builder and the other tradesmen will be a construction contract.
Letting agencies and maintenance contracts
Many letting agencies will provide property management services to its landlord clients. The management services can cover the collection of rents as well as ensuring the properties are maintained.
Whether or not the letting agency could be regarded a contractor for the purposes of the CIS, will depend on the contractual arrangements, which could be arranged in two ways:
- The landlord contracts directly with the subcontractor and the letting agency’s role might be to oversee the works to ensure the works are undertaken in accordance with the contract and may also involve making payments to the subcontractor, or
- Under the landlord/agency contract, the agency, as a part of its management services, also provides maintenance services and it will contract with the subcontractor for any necessary works to the landlord’s property.
Under 1), the letting agent would not be regarded a contractor for the purposes of the CIS but under 2) it could be if the letting agency meets the definition of a deemed contractor (ie its cumulative expenditure on construction operations exceeds £3m over the previous rolling 12 months). The question of whether or not the deemed contractor rules apply is also open to challenge, particularly if the landlord is regarded a contractor themselves.
Where the agency sets up a subsidiary property maintenance company, the same principles will apply. The only difference will be that the rules relating to deemed contractors will not apply to the property maintenance company and therefore it will be a contractor from day one irrespective of the level of its expenditure on construction operations.
When deciding whether CIS is in point, the starting point is establishing the contractual arrangements and what works could be undertaken or services that could be provided under that contract. If, having considered the position, the contract can be said to be within the meaning of a construction contract, then CIS must be operated on any payments made under that contract regardless of what the payment relates to.