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Taxation in the construction industry

Published Friday, June 23, 2017

For over 30 years businesses in the construction industry have operated a special scheme to account for tax on payments made between contractors and subcontractors. After a long period of consultation, the 'Construction Industry Scheme' was reformed in 2007. This note discusses the background to this reform.

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Businesses operating in the construction industry – be they companies, partnerships or self-employed individuals – may be contractors or subcontractors: subcontractors are businesses paid to carry out building work for contractors.  Under the construction industry tax deduction scheme – which was introduced in 1971 – contractors have had to make a deduction from any payment made for work done by a subcontractor, to be set against the subcontractor’s liability for tax and National Insurance contributions (NICs). Under certain circumstances subcontractors have been entitled to receive payment gross of tax, under what was commonly known as the ‘lump scheme’.  Significant changes to these rules were announced in February 1994, following concerns that the lump scheme was being exploited to evade tax.  Legislation was introduced under schedule 27 of the Finance Act 1995 and section 178 of the Finance Act 1996, and the new construction industry scheme (CIS) came into operation on 1 August 1999.

In the 2003 Budget the Labour Government announced that a reformed CIS would be introduced from April 2005, following complaints about the scheme’s processes and the compliance costs faced by businesses.[1]  Provision to this effect was made in the Finance Act 2004 (ss 57‑77, schedules 11 & 12),[2] though implementation of the new scheme has been delayed twice: first to April 2006,[3] and then to April 2007.[4]  In November 2006 HM Revenue & Customs (HMRC) launched an advertising campaign on the new features of the scheme,[5] and subsequently the department collated detailed guidance material for contractors and subcontractors on its site

There have not been any major changes to the new CIS since its launch, and relatively little comment on its operation, though in October 2010 HMRC published research which suggested that in the main the new scheme had met its policy aims.[6]

Recently the 2017 Budget announced a consultation on policy options to tackle fraud in the provision of labour in the construction sector.[7]  The Government is proposing the introduction of a VAT domestic reverse charge, an anti-fraud measure which transfers the responsibility for accounting to HMRC for VAT on specified goods and services from the supplier to the customer.[8] In addition the Government is also looking at tightening the rules around gross payment status within the CIS: that is, the criteria that subcontractors must satisfy to receive payments gross of tax.

This note examines the historical development of the construction industry scheme, before looking at the Government’s recent consultation on amending its rules to reduce the incidence of tax fraud.

Notes : 

[1]     Budget 2003, HC 500, April 2003 para 3.29

[2]     The operational detail of the new scheme was set out in secondary legislation: the Income Tax (Construction Industry Scheme) Regulations SI 2005/2045.

[3]     Pre-Budget Report, Cm 6042, December 2003 para 3.48

[4]     HC Deb 19 October 2005 c1106W

[5]     HM Revenue & Customs press notice NAT 68/06, 10 November 2006

[6]     HMRC, Evaluating the Construction Industry Scheme : Research Report 106, October 2010

[7]     Budget 2017, HC 1025, March 2017 para 3.48; HM Treasury, Overview of tax legislation & rates, March 2017 para 2.30. The consultation was launched on 20 March; the closing date for comments is 9 June. Details are collated on

[8]     For details of how existing schemes operate see, HMRC, VAT Notice 735: VAT domestic reverse charge on specified goods and services, April 2015.

Commons Briefing papers SN00814

Author: Antony Seely

Topics: National insurance, Taxation

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