Stephanie Canham explains the pitfalls of the CIS tax rules, whose scope extends far beyond what some may think

In the tax world there is a lot of debate about what is the “right amount of tax” that a business should be paying. Most people would say double taxation on the same income is plain wrong, but that was the outcome in the recent case of Ormandi vs HMRC.


The Construction Industry Scheme or CIS applies to payments for building work made by a construction business or by any business that, broadly, has a construction spend of at least £1m a year. Construction work is widely defined and includes repair, painting, decorating, installation and demolition. Payments to employees are excluded from the CIS. 

The CIS refers to the person making the payment as a “contractor” and the person receiving the payment as a “subcontractor”. This can lead to confusion because in the top contract in a construction supply chain, the client or employer will be a CIS contractor and the main contractor will be a CIS subcontractor. In the next contract down, the main contractor will also be a CIS contractor and its subcontractors will be CIS subcontractors. Those subcontractors will also be CIS contractors in relation to payments they make to sub-subcontractors and so on.

The purpose of the CIS is to act as a mechanism for collecting and paying the tax rather than to impose an additional tax

A CIS contractor (which is any construction business making construction payments) must register with HMRC and file monthly returns. Before making a payment it should check the CIS status of the CIS subcontractor, a process known as “verification”. HMRC will confirm to the CIS contractor which of these apply:

  • The payment can be made without deductions, which it will do if the CIS subcontractor has “gross payment” status with HMRC.
  • The CIS contractor has to deduct tax from the payment at either 20% or 30%, in which case it must pay this to HMRC with its monthly return.

If tax is not deducted, the CIS subcontractor will, of course, declare the receipt in the usual way on its tax return and pay income tax or corporation tax. If on the other hand tax is deducted by the CIS contractor then the CIS subcontractor can credit the tax against its upcoming monthly PAYE liabilities or, if the credit is unused, against its annual income/corporation tax liability. From this we can see that the purpose of the CIS is to act as a mechanism for collecting and paying the tax rather than to impose an additional tax.

In the case of Ormandi vs HMRC, Mr Ormandi paid CIS subcontractors (not his employees) for construction work and admitted he had never heard of the CIS. Unfortunately, ignorance of the law is no excuse and HMRC:

  • Imposed penalties for not being registered and not filing any monthly returns.
  • Issued a direction in respect of some payments where HMRC were satisfied that those payments had been declared on income or corporation tax returns submitted by the CIS subcontractors.
  • Assessed Mr Ormandi for tax he should have deducted from the remaining payments made to CIS subcontractors who were not registered for gross payment. As Mr Ormandi had already paid the CIS subcontractors, he would have to fund this tax out of his own pocket.

Mr Ormandi accepted the penalties but he contested the assessment for tax where he was able to produce evidence that indicated the CIS subcontractors had paid tax on the payment. The tribunal accepted that on the balance of probabilities those CIS subcontractors had paid tax on the income received from Mr Ormandi. 

Mr Ormandi claimed this led to double taxation as he would have to pay tax on those payments when the CIS subcontractors had already paid income or corporation tax on the same payment.

The main lesson to be learned here is to comply fully with the CIS

HMRC had some discretion on the amount assessed but was unsympathetic. The tax tribunal agreed with HMRC that HMRC’s view was the “inescapable result of the legislation” but only after expressing reservation at the “unsatisfactory result [of the] double taxation of these payments”.

The main lesson to be learned here is, of course, to comply fully with the CIS. In my experience, these are the most likely mistakes:

  • Thinking the CIS applies only to contractors rather than clients/employers – in fact it applies to anyone with a business involving construction work, including developers and other site owners who would be the client/employer.
  • Thinking the CIS does not apply to payments made by landlords – in fact the CIS can apply to landlords if they have spent above £1m on average over the last three years.
  • Thinking the CIS applies only to pure building work on new buildings when in fact it applies to demolition, repair, installation, extensions and internal cleaning after a building project.
  • Thinking HMRC will be lenient as long as everyone pays their tax in the end – as this case shows, that is not correct.

Stephanie Canham is national head of projects and construction at Trowers & Hamlins