HMRC confirms Construction Industry Scheme doesn’t apply to pure financing arrangements

HMRC said the latest version of the guidance published on 4 June provided “further clarity” after guidance issued on 5 May created some initial uncertainty over when contracts funding construction operations could fall within the scope of the CIS.

The CIS rules generally require ‘contractor’ businesses to deduct tax at a rate of 20% or 30% on payments to subcontractors under ‘construction contracts’. However, subcontractors may still be entitled to receive payments gross if they have registered with HMRC and satisfied various compliance requirements.

The term ‘contractor’ is widely defined for CIS purposes and can include a wide range of businesses beyond those undertaking traditional construction activities. It had previously been accepted practice that the CIS does not apply to lending agreements. 

However, guidance published last month created uncertainty by stating that a business can become a ‘contractor’ for the purposes of the scheme, where it enters into a contract that “funds construction operations”. 

In updated guidance issued on 4 June, HMRC confirmed that pure financing arrangements, including lending, providing finance and grant funding, all fall “outside the scope of CIS”.  

Property tax expert Andrew McCarthy of Pinsent Masons said the update provided helpful clarification for the market. “HMRC’s latest update to the CIS manual provides welcome clarity on the scope of the regime to pure financing arrangements and will come as a relief to the real estate development sector,” he said. “It is also positive that HMRC responded constructively to widespread stakeholder concerns by issuing this update so quickly.” 

A business that fails to apply the CIS rules correctly can be liable to pay interest and penalties. New measures to combat fraud across the construction sector were introduced from April 2026 that require businesses to take steps to prevent CIS fraud by their subcontractors. A business is at risk of significant penalties if it knew, or should have known, that it entered into a transaction connected with CIS fraud.  

The new anti-fraud measures clarify that a ‘contractor’ can be liable for unpaid tax and penalties arising from fraud of a ‘subcontractor’. 

In light of these new compliance obligations, McCarthy said HMRC’s updated guidance would likely be well received by lenders. “It will come as a significant relief to lenders that they don’t need to expand already extensive due diligence processes to consider compliance with the CIS by both borrowers and borrower’s subcontractors,” he added.