Project managers and clients beware: under certain circumstances, you may fall under the Inland Revenue’s CIS scheme – with unpleasant consequences

Dear Project Manager,

You probably think that you are a consultant and that your clients are clients. In my view, this is not always the case. Sometimes your client is what I call a contractor and you are a subcontractor. In case you didn’t know, this means that your client should not be paying you at all unless you are registered under the Construction Industry Scheme. Even if you are registered, your client should be holding back 18% of your fees and giving it to me unless you have a special certificate called a CIS5 or a CIS6. Penalties and interest can be imposed in cases of non-compliance.

Just thought you might be interested …

Yours sincerely, CU Incourt, Inland Revenue

Frightening stuff, but in certain circumstances Mr Incourt could well be correct. None of his colleagues seems to have taken the point yet, but if you look at the letter of the law behind the Construction Industry Scheme, they could.

To understand why this may be so, we need to start with the easy bits. Under the CIS, a client can be classified as a “contractor” if it is in the construction business, or if it is in any other business but spends, on average, more than £1m a year on “construction operations”. A “subcontractor” is anybody the contractor appoints to carry out those construction operations, or who arrange for others to do so, or anybody who is answerable for the carrying out of the operations by others. Applying this test, it is easy to see that a developer would be a “contractor” and the contractors it engages would be “subcontractors”.

So where does the project manager get caught? The project manager is, you would think, a consultant, not a contractor, and provides professional advice rather than being responsible for the work itself. As a starting point, the law agrees with this position. The definition of “construction operations” in the Taxes Act specifically excludes “the professional work of architects or surveyors, or consultants in building, engineering, interior or exterior decoration or in the laying out of landscape”. It is when we look more closely that the problems arise. Inland Revenue guidance confirms that all work done by architects and surveyors as part of their “normal professional discipline” is excluded.

Other professionals are excluded “only if they are acting purely as consultants … Any work that could be seen as the supervision of labour or the co-ordination of construction work using that labour is not excluded”.

Many project managers are chartered surveyors. Does this put them within the first exclusion and safely outside the reach of the CIS? I suspect not. It is likely that the exclusion for surveyors extends only to the professional role of a surveyor, be it in acting as the quantity surveyor, carrying out building surveys or otherwise. Project management itself is not squarely within this professional discipline.

It does not take a genius to see that not being paid what you expect to receive is not great for cash flow

In response to client demand, some project managers are offering a one-stop shop whereby they effectively acts as developer – appointing the design team and contractor and assuming responsibility for the works. If the client in question happens to be a “contractor”, the project manager will be a “subcontractor”. He will need to get registered under the CIS in order to be paid at all, and get a special certificate in order to avoid the client having to withhold tax. It does not take a genius to see that not being paid, or being paid 82% of what you expect to receive, is not great for cash flow.

It gets worse. If the contractor taken on by the one-stop-shop project manager does have all of the necessary paperwork, the project manager will have to pay it 100% of its entitlement, regardless of any withholding by the client upstream.

There is another area where project managers could get into trouble. The Inland Revenue’s internal (but public) guidance on the scheme mentions project managers as an example of consultants whose role extends beyond consultancy as they become closely involved in the supervision of a project. Even when they are not offering the one-stop shop that includes responsibility for the works, if the project manager’s scope of services takes him over the line from acting as consultant to supervising labour or co-ordinating construction work this will bring him within the scheme. Does the combined role of project manager and employer’s agent under a design-and-build contract cross this line? It probably depends on the detail of the scope of services, but the risk must be there.

The final bit of bad news: you might think that if the line is only crossed in one or two areas this counts for only a small portion of the overall fee. Your client has not taken the point, so you might take the risk of ignoring the scheme. Sadly, the Inland Revenue guidance is clear that if a contract includes some work that is within the scheme and some that is not, all payments made under the contract will come within the scheme.

It is not just project managers who have something to fear here. The CIS actually focuses on the payer. If you are a client engaging a project manager in the circumstances that I have outlined, you could be liable to a penalty if you pay the project manager without having seen their CIS registration card or CIS certificate. Further, if you should have deducted payments for tax, the Inland Revenue could come after you for these, even though you have paid the full amount to the project manager.

To begin where we started, so far as I know the Inland Revenue have not yet taken this point. However, I cannot imagine that any client or any project manager will be volunteering to be the test case.

Patrick Holmes is a partner in solicitor Macfarlanes