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HMRC internal manual

Construction Industry Scheme Reform Manual

The Scheme: payments: expenditure by certain businesses on their own property - 'own-build'

CISR15600 Action guide contents

What ‘Deemed’ contractor payments are exempted by Reg 22?

Under SI2005/2045 reg 22, businesses brought into the Scheme because they spend an average of more than £1 million on construction operations each year do not need to apply the Scheme to expenditure that relates to property used for the purposes of the business itself, or, if the business is a company

  • other companies within the same group
  • any company of which 50% or more of the shares are owned by the company.

The types of properties covered by this exemption include

  • offices
  • warehouses
  • nursing homes
  • leased property used by the business’s group, including property leased by one company to another within the same group
  • any other facilities used for the business.

Any incidental use of the property by third parties, such as auditors, project team members who are not employees and security staff, will not affect the exemption.

You should also note particularly that SI2005/2045 reg 22 applies to ‘businesses’ as specifically described at FA04/s59(1)(l). This regulation does not apply to, for example, public offices and local authorities.

It is important to note that it is the payment that is exempted by SI2005/2045 reg 22. It does not exempt the business itself, nor does it exempt the construction contract.

Examples of payments made by Deemed Contractor businesses for construction operations, that are exempted under SI2005/2045 reg 22.

  1. A business commissions the building of a new factory/industrial plant, or the extension/alteration of an existing factory/industrial plant, to be solely used for the purpose of that business.

  2. A Company commissions the building of new office accommodation, or the refurbishment of existing office accommodation, which is to be used for the purpose of that Company’s business.

  3. A retailer commissions the building of a new shop/store, or the refurbishment of an existing shop/store, to be solely used for the purpose of their business.

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What ‘Deemed’ contractor payments are not exempted by Reg 22?

SI2005/2045 Reg 22 allows ‘deemed’ contractors to exempt construction payments but only ‘in respect of construction operations relating to property used for the purposes of the business of that person.’ This regulation also goes on to state that ‘the property is not used for the purposes of the business of a person if it is for sale or let’ (except where purely incidental), ‘or is held as an investment by that person’.

The Scheme must therefore be applied to expenditure for construction work on any of the following types of property:

  • property that is not used for the purposes of the business, such as where it is let for commercial purposes to a third party
  • property that is for sale or to let
  • property that is held as an investment.

But note the Amending Regulations, SI2007/672 reg 6 which says “except where the sale or letting of that property is purely incidental to the business of that person”.

Where a subcontractor is engaged by a ‘Deemed’ contractor business who is entitled to exempt payments to that subcontractor under SI2005/2045 Reg 22, the exemption does not continue to apply further along any contractual chain. If the subcontractor to the Deemed contractor decides to engage another subcontractor they will become a contractor themselves defined under S57(2) (b)(i) FA/04 and CIS must apply. The majority of contractors in CIS are contractors under this legislative subsection by virtue of this contractual arrangement.

Examples of payments made by Deemed Contractor businesses for construction operations not exempted under Reg 22.

  1. A supermarket chain contracts with a subcontractor to build them a new store in a development that will also include the construction of some social housing, which the supermarket chain intends letting to tenants.
  2. A property investor engages a subcontractor to carry out a £5m refurbishment to a recent property acquisition. As the property is held as an investment, the contract payment to the subcontractor falls within the Construction Industry Scheme. (N.B. Property Investors will only be brought into CIS as deemed contractors, where their expenditure on construction operations exceeds £1m per annum, as per Section 59(1)(L) Finance Act 2004).

  3. An Insurance company providing property insurance, directly engages and pays subcontractors to carry out repairs to the properties of their policy holders, rather than making payments directly to the policy holders themselves.

The payments for construction operations made by the insurance company do not relate to property used for the purposes of their business. Therefore contract payments made by the insurance company to the subcontractor fall within the CIS.

(Note; where the insurance company has expenditure on construction operations to property it uses for the purpose of its own business, the refurbishment of its head office building for example, or its own call centres, then these payments may be exempted under Reg 22).

Where a business brought into the Scheme by virtue of it spending an average of £1 million or more on construction operations informs HMRC that all its payments for construction operations will fall within the terms of SI2005/2045 reg 22, you may wish to consider whether the contractor should be de-registered informally from the Scheme. See CISR12060 for more details.