CISR12055 - The Scheme: contractors: applying the statutory test for ‘deemed’ contractor” status
Section 59(1)(l) Finance Act 2004
Where a business is not already a mainstream contractor via the provisions at section 59(1)(a) Finance Act 2004 (see CISR12040), then that business may instead be a “deemed contractor” if it satisfies the construction expenditure threshold tests contained within section 59(1)(l) Finance Act 2004. In this page of the manual we will concentrate on applying that test.
Section 59(1)(l) FA 2004
states ‘ in the period of one year ending with that time, the person’s expenditure on construction operations exceeds £3,000,000.’
In applying this test, the business must at any time on a rolling basis (for example – day-to-day, month-to-month) calculate all of the construction expenditure it has incurred over a 12-month period. If the expenditure over those 12-months is over £3 million, then that business becomes a deemed contractor from that date and is therefore required to register as a contractor within the Construction Industry Scheme.
When assessing the deemed contractor threshold HMRC looks at the person’s expenditure on construction operations included in the contract payment. For these purposes, the term ‘expenditure’ means expenditure excluding VAT, that is before the application of VAT. For example, if the contract price is £1 million + VAT the expenditure figure to be taken into account for the purpose of the test is £1 million.
Example 1
Company A does not ordinarily operate in the construction industry and is therefore not a mainstream contractor. Over recent months it has incurred construction expenditure when engaging 3rd parties to undertake construction work, Company A must now review any construction payments to see if it reaches the £3 million qualifying construction spend threshold within the previous 12-month period; if it does, then Company A becomes a deemed contractor.
Company A monitors its construction payments over the previous 12 month period spanning 06/01/2020 to 05/01/2021, which are as follows:
| Date | Payment | Cumulative total |
|---|---|---|
| July 2020 | 620,000 | First construction payment |
| August 2020 | 700,000 | 1,320,000 |
| September 2020 | 600,000 | 1,920,000 |
| October 2020 | 250,000 | 2,170,000 |
| November 2020 | 550,000 | 2,720,000 |
| December 2020 | 250,000 | 2,970,000 |
| January 2021 | 150,000 | 3,120,000 |
December 2020 indicates the cumulative total spend on construction is nearing the £3 million threshold and it would be prudent for Company A to begin the registration process at this point if further construction is to be undertaken.
The deemed contractor threshold was exceeded when the January 2021 payment was made. Company A becomes a deemed contractor and is required to register as a contractor within CIS immediately.
Similarly, a business may de-register from CIS if their construction spend falls below the £3 million threshold in the previous rolling 12-month period and no further construction by the business is expected to be undertaken which would exceed the £3 million threshold. If you wish to de-register from the CIS you will need to contact the CIS Helpline on 0330 200 3210.
If construction work should decrease or cease for short periods of time HMRC recommends that businesses do not de-register from CIS but use the facility to have a temporary period of inactivity applied. You can find more guidance on this process at CISR61280.