CIS compliance for property developers

CIS compliance for property developers 

The Construction Industry Scheme (CIS) is a scheme whereby contractors of building firms are required to deduct tax at source from payments made to sub-contractors working for them. Some sub-contractors are entitled to be paid without any tax deduction, others at 30% as per HMRC’s instructions but the majority have 20% tax withheld before payment. The scheme requires registration as a contractor and administration in the form of monthly submissions; the penalties for non and/or late submission can be severe.

Definitions

The definition of ‘contractor’ is widely drawn – HMRC’s Construction Industry Scheme guide CIS 340 defines a (mainstream) contractor as ‘a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be … many other businesses.‘

The definition of ‘construction work’ is again widely drawn to include the construction, alteration, repair, extension, demolition or dismantling of buildings and/or work – although there are exceptions. A business set up to undertake such construction work is obviously required to operate the scheme as would a property developer undertaking a trading business in construction of properties being developed for sale (even if just on one property). Private householders paying for work on their own homes will never fall within the CIS regime’s scope.

Buying property as an investment

In comparison, someone who buys and rents out property typically does so as an investment; this would appear to be confirmed as under section 12080 of The Construction Industry Scheme Reform Manual it states that:

“A ‘property investment business’ is not the same thing as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental.“

However, a problem arises when an investor landlord buys a property, doing it up intending to keep it as a rental property – is that person now a developer and thereforecaught under the CIS rules? HMRC confirm that this is the case as further on in the CIS manual it states that:

“Where a business that is ordinarily a property investor, undertakes activities attributed to those of ‘property development’, they will be considered a mainstream contractor [caught for CIS] during the period of that development”. 

Therefore, the investor now becomes a developer liable to register as a contractor under the CIS regime even if just one property is renovated.

Wider scope for the CIS scheme The system goes further because even where the landlord is predominantly a property investor and therefore not a construction business (e.g. a restaurant chain), they are deemed to be a contractor and subject to the CIS regime if they spend more than £1 million a year, on average, for three years on ‘construction operations’ (e.g. repairs, construction of extensions etc), on their premises or investment properties. There is a slight ‘let out’ in that such businesses can ignore expenditure on property such as offices or warehouses used by the business itself.

Some businesses commission construction firms to undertake work for them but if the work is for the business’s own premises, used for that business, then the business itself is not obliged to register or act as a CIS contractor.

‘De minimus’ limit

There is a ‘de minimus’ limit in that on application, HMRC can authorise deemed contractors not to apply the scheme to small contracts for construction operations amounting to less than £1,000, excluding the cost of materials however this arrangement does not apply to mainstream contractors.

Tenant in common v joint tenants – What is the difference and does it matter?

Under English law, there are two ways in which property can be owned jointly – as tenants in common or as joint tenants. The way in which the property is owned can have tax implications.

Tenants in common

Where a property is purchased as tenants in common, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.

Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.

Joint tenants

Where a property is owned as joint tenants, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.

Tax considerations

If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.

However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an election on form 17 for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Where a 50:50 split does not give the best result, consider owning the property as tenants in common.

For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.

On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.

Plan ahead

When buying a property, consider the tax implications when deciding whether to own a property as joint tenants or tenants in common.