Loss Prevention Alerts

Loss Prevention Alert No 43

Construction Industry Scheme: Issues to be considered by Consultants

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS.  It highlights issues that the LPWG considers may be of relevance to members.  It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

1. Introduction

The Construction Industry Scheme (CIS) was introduced to try and stop tax evasion by small construction contractors in the UK.  The latest version was implemented on 6th April 2007.  It relates to how payments are made to subcontractors by contractors for construction work (excluding costs of materials) and, depending on the subcontractor’s tax status, requires contractors to make a deduction, which is then paid to HM Revenue and Customs (HMRC).

AGS members who are contractors will be well aware of how the CIS operates.  Any contract that includes ‘construction operations’ is a construction contract on which CIS must be applied.  If consultant members are not clear about how they provide their professional services, and they commission and manage investigative works, they are at risk of being deemed contractors, and so fall within the CIS scheme.

This Alert provides guidance to consultants on how the CIS operates.  However, interpretation of the Scheme in particular circumstances is for the HMRC, who should be contacted if the member has any doubt about how the Scheme operates.

2. Exclusions from the Scheme

Section 74(3)(e) of the Finance Act 2004 (ref. FA04/S74(3)(e)) excludes from the CIS the professional work of architects or surveyors, and the consultative services of others in the fields of building and engineering (and some other development related fields).  Consultants must stand apart from the execution or management of construction work if they are not to be included within the CIS.  The consultant can supply technical advice, assessments, plans or designs.  According to the HMRC guide “CISR14270 – The Scheme: construction operations; professional work” inspection or testing is also excluded.  This is discussed more fully below.

3. Construction Operations

Under the Finance Act a wide range of activities are considered construction activities, including permanent and temporary works.  For example tunnelling, boring and drilling (except drilling specifically for oil or natural gas) are all considered to be construction operations.  Trial pits are also construction works. Therefore, should a consultant undertake any of these operations then strictly his contract of engagement would include construction operations and the whole of his contract could be considered to be a construction contract.

4. CIS where consultants undertake works which support professional services

HMRC guidance recommends a ‘common sense’ approach, such that   minor construction activities, such as ‘boring for soil samples’, ‘digging an inspection trench’, ‘soil testing’, ‘environmental testing’ and ‘pipeline testing’ are deemed to be part and parcel of the overall contract for professional work, if they do nothing more than assist in providing a professional service. In these cases CIS does not apply.  Similarly the taking of measurements on instrumentation will not be considered a construction operation where it is part of the provision of the consulting service.

Therefore, it is important that AGS consultant members are very careful to avoid crossing the line between ‘works to assist provision of professional services’ and ‘construction works’. The latter would include any works undertaken as result of survey/investigation work, such as remediation or other corrective action.  An example given in the HMRC guidance is where robotic pipe inspection becomes a construction operation when the robot also makes good defective joints.

5. CIS where consultants undertake minor construction operations

Similarly, any work that goes beyond a consultative or advisory role and becomes the supervision of labour or the co-ordination of construction work is not excluded from the CIS scheme. It is important that consultants in a site role providing observation and verification services specifically exclude ‘supervision’ and ‘direction’ of the works from the brief.  The role of ‘Engineer’ or equivalent under a standard form of contract, which requires direction and supervision of the works within the chain of command running from Contractor to workers, may fall under CIS.

It is also possible for exploratory works to become construction works. An example of inadvertent construction work is where a trial pit identifies contamination and the client asks for it to be dug out and removed ‘whilst the plant is on site’.  If the consultant were carrying out the pitting under his appointment, and accepted the additional commission, this would result in the consultant becoming a contractor and the whole of the works falling under CIS.

6. Summary

Strictly the CIS scheme applies to specific operations such as drilling boreholes, but where the activity is only to enable consultants to carry out their professional work, which is outside CIS, HMR&C state that it forms part and parcel of the professional work and there is no need to operate CIS.

A clear distinction must be determined and maintained between operations which are exempt and those which are not.  Where there is doubt the local tax office should be contacted for advice. (http://search2.hmrc.gov.uk/kbroker/hmrc/locator/locator.jsp)

Where consultants undertake works which are not exempt or can be deemed to be ‘construction works’ they will need to comply with the requirements for contractors under the CIS.  

This Loss Prevention Alert is, of necessity, generic and is not intended to be a complete or comprehensive statement of the law, nor does it constitute legal or specialist advice.  It is intended only to highlight issues that may be of interest to AGS members.  Neither the writer, nor AGS, assumes any responsibility for any loss which may arise from accessing, or reliance on the material and all liability is disclaimed accordingly.  Professional advice should be taken before applying the content of the Alert to particular circumstances.