Calling all construction supply chains - CIS versus CITB – do you know the difference?

Rhian Lloyd, Employment Tax and HR Manager at Aspire Business Partnership, investigates the difference between the scopes of the Construction Industry Scheme (‘CIS’) and the Construction Skills Training Board Levy (‘CITB’) and how you could be caught out by an honest mistake. Remember, just because a construction activity is out of scope of the CIS, it doesn’t necessarily mean it is out of scope of the CITB Levy!

Scope of the CITB

Schedule 1 of the Industrial Training (Construction Board) Order 1964 (Amendment) Order 1992 details the activities of the construction industry that the scope of the CITB Levy applies to. If your business’ activities consist wholly or mainly of construction activities as detailed in Schedule 1 then you will need to submit an annual Levy Return and be charged an annual Levy consisting of 0.35% of PAYE payments and 1.25% of your payments to net subcontractors. The CITB govern the CITB Levy and you are not obliged to submit a Levy Return until you are requested to do so by the CITB.

Tip; to reduce your CITB Levy Assessment it is worth engaging with gross status subcontractors only.

Tip; Although the legislation governing the CITB Levy refers to “employee, employer and employment” the definition captures all individuals engaged under a contract of service or a contract for services. Therefore, there is no escaping payments made to limited companies, one man Personal Service Companies or self-employed subcontractors.

To assess if you are “wholly or mainly” in construction, you must review what activities all individuals undertake via the different contracting methods discussed and whether more than 50% of their time consists of undertaking “construction activities” as defined by Schedule 1. We recommend that this exercise is undertaken if, and when, the CITB write to you asking you to complete a Levy Return and/or if they advise that they believe you should be on their register. However, if you do currently pay the CITB Levy, it would also be worthwhile to conduct the same exercise on the basis that you may not be operating wholly or mainly in construction industry activities as detailed in Schedule 1 and so, not due to complete Levy Returns and pay a Levy Assessment.

CITB matters taken to the High Court have resulted in decisions that state activities deemed a construction industry activity are all of those that “alter space within a building”, therefore an activity such as hanging a door would be deemed a construction operation or the application of window film as it altered the thermal capacity in a building. Therefore, it is clear that the CITB and the Courts apply a wide definition to the activities captured by the CITB Levy.

The CITB has been subject to industry criticism following the introduction of the Apprenticeship Levy in April 2017, with some construction companies having to pay both levies. To alleviate some of the strain, the CITB reduced their PAYE rate from 0.5% to 0.35% following the support CITB has been shown by employers to continue with its levy-raising powers following a call for evidence which opened in March 2017. Therefore, it seems the CITB Levy is here to stay, despite reports earlier this year that it will reduce its staff numbers by half due to the outsourcing of many functions.

Scope of the CIS

Section 74 of Chapter 3, Part 3 of the Finance Act 2004, details the meaning of construction operations for the purposes of the CIS. HMRC’s Booklet CIS 340 provides a useful summary of the scope of the CIS as well as extracts from Section 74 itself. The CIS is operated by HM Revenue and Customs (‘HMRC’) and you must comply with your obligations and responsibilities under the CIS from day one of your registration as a subcontractor, contractor or both.

Compliance is key when it comes to the operation of CIS due to the ultimate consequence of a failure resulting in the revocation of gross payment status with immediate effect. Therefore, it is important to meet all obligations and to avoid any compliance failures.

Tip; There is a misconception in the industry that if a worker is being paid PAYE, or if you are engaging with a limited company or one man Personal Service Company, then CIS can be ignored throughout the supply chain and not applied. This is not true and so, all contractors should verify their subcontractors and make the appropriate deductions from payments, where necessary.

Comparison

There has been no consultation or suggestion that the scope of the CIS and CITB Levy will be aligned at any point, however, upon corresponding with CITB Officers, they have commented that their view is that the scope of the CIS and CITB should be aligned.

Although it would simplify understanding in the industry and the application of both the CIS and the CITB, it could cause additional costs to construction businesses. For example, if a business currently paid 100 x net subcontractors £3million over the course of 12 months to fulfil the role of Site Managers then currently no CITB Levy would be due on those subcontractors. However, if the CITB scope was aligned with the CIS scope, 1.25% of £3million would due, adding £37,500 to a Levy Assessment.

However, the advantage of this would be that there would be more levy funds collected from employers for them to invest back into the industry through training.

Despite it potentially streamlining running a construction business, the alignment of both scopes does not seem a possibility and so it is important (and unfortunate!) that you need to know the difference between a construction operation for CIS purposes and a construction industry activity for CITB purposes, or work with somebody that does. The difference between what activities are inside and outside of each scope is a minefield. For example;

I could go on and on as there are so many differences in regard to what is inside and outside the scopes of both of these schemes. The confusion surrounding two different sets of legislation and guidance is a lot to consider and obviously there are a huge variety of job roles within the construction industry, all of which need to be assessed for the consideration of applying the CIS and determining whether you should be subject to the CITB Levy and if so, the estimate of your Levy Assessment to pay.

Summary

Unfortunately, nothing ever seems to be easy and operating a business in the construction industry is no exception to this. Not only is the scope of the CIS and CITB a minefield, the construction industry is at the forefront of a variety of regulatory authorities’ attention lately, with spotlights on the industry thanks to the Carillion collapse, the Gangmaster’s Labour Abuse Authority (‘GLAA’) construction protocol, high use of agency and migrant labour and, as always, non-compliance with reporting or statutory obligations resulting in financial and reputational risk and, ultimately, revocation of gross payment status – the pressure is on!

Seek advice if you are unsure of your compliance obligations, with particular focus on the CIS on the basis that CIS failures could ultimately result in the loss of gross payment status, which could be detrimental to a company in the construction industry.

If you need any assistance with the application of the CIS or CITB Levy, or you are concerned with any of your compliance obligations, then please contact Aspire.