LODGE: A Living Sector Update - Summer 2025


Tax compliance considerations at the start of a Living Sector project

By Liz Hughes


Purpose built student accommodation (PBSA) and build to rent (BTR) projects almost always involve construction work either to create new build accommodation or to convert an existing building. Tax on construction work should always be considered, in particular the Construction Industry Scheme and the VAT Domestic Reverse Charge. This article provides a high level overview of these tax considerations.

Failure to consider the Construction Industry Scheme and the VAT Domestic Reverse Charge can have a significant impact on the cash flow for a construction project. Cash flow issues can obviously cause delay and impact on potential returns for all parties. Delay is a particular risk for PBSA given the need to have accommodation ready for the start of the next academic year. From 1 October 2026 the new Building Safety levy must also be considered. Failure to pay the levy will result in a delay in obtaining a building completion control certificate.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) was introduced over fifty years ago to tackle tax evasion within the construction industry. Although it is not new, it has a broad scope applying to both providers of construction services and their customers, and this broad reach can catch out the unwary. The first question to consider is whether you are a CIS Contractor and/or a Sub-Contractor.

Failure to consider the Construction Industry Scheme and the VAT Domestic Reverse Charge can have a significant impact on the cash flow for a construction project. Cash flow issues can obviously cause delay and impact on potential returns for all parties. Delay is a particular risk for PBSA given the need to have accommodation ready for the start of the next academic year. From 1 October 2026 the new Building Safety levy must also be considered. Failure to pay the levy will result in a delay in obtaining a building completion control certificate.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) was introduced over fifty years ago to tackle tax evasion within the construction industry. Although it is not new, it has a broad scope applying to both providers of construction services and their customers, and this broad reach can catch out the unwary. The first question to consider is whether you are a CIS Contractor and/or a Sub-Contractor.

CIS Contractors

Contractors include not only businesses engaged in construction operations but also any business with expenditure on construction operations of more than £3 million in the past year. This rolling annual test is likely to catch any student accommodation providers employing a main contractor to construct new student accommodation and many build to rent projects. SPV companies paying for construction works may not be a Contractor at the outset of a project. Once the £3 million threshold has been reached the CIS rules must be applied. CIS Contractors must then consider the CIS status of the Sub-contractors that they employ to carry out construction works.

CIS Sub-contractors

Sub-contractors are entities paid to carry out construction operations. There are three categories of Sub-contractors:

  • Unregistered - not registered with HM Revenue & Customs (HMRC) under the Construction Industry Scheme
  • Registered for payments under deduction - registered with HMRC under the Construction Industry Scheme but do not meet the gross payment conditions
  • Registered for gross payment - registered with HMRC under the Construction Industry Scheme and meet the gross payment conditions

CIS Contractors

Contractors include not only businesses engaged in construction operations but also any business with expenditure on construction operations of more than £3 million in the past year. This rolling annual test is likely to catch any student accommodation providers employing a main contractor to construct new student accommodation and many build to rent projects. SPV companies paying for construction works may not be a Contractor at the outset of a project. Once the £3 million threshold has been reached the CIS rules must be applied. CIS Contractors must then consider the CIS status of the Sub-contractors that they employ to carry out construction works.

CIS Sub-contractors

Sub-contractors are entities paid to carry out construction operations. There are three categories of Sub-contractors:

  • Unregistered - not registered with HM Revenue & Customs (HMRC) under the Construction Industry Scheme
  • Registered for payments under deduction - registered with HMRC under the Construction Industry Scheme but do not meet the gross payment conditions
  • Registered for gross payment - registered with HMRC under the Construction Industry Scheme and meet the gross payment conditions

Cash Flow

The status of the Sub-contractor affects their cash flow. A Sub-contractor that is registered with HMRC for gross payment can be paid the full contract sum with no deductions. For any other Sub-contractor, the Contractor must withhold a percentage (either 20% or 30%) and pay this sum to HMRC. Only the balance (either 80% or 70%) is paid to the sub-contractor. Although, the Sub-contractor can set the sums paid to HMRC off against their income tax or corporation tax, there is an impact on their cash flow.

What is the VAT Domestic Reverse Charge?

The VAT Domestic Reverse Charge (DRC) is another measure designed to counter tax evasion. It operates as a VAT accounting rule affecting which party to a contract must account to HMRC for VAT on payments for construction works, but not construction materials. It “reverses” the standard position that the supplier (rather than the customer) is required to account for VAT to HMRC. Where VAT is due on payments for construction works there is always the question of whether it is recoverable, and so a cash flow cost only, or irrecoverable and so an additional cost. The DRC adds an additional layer of complexity as taxpayers must consider which party accounts to HMRC for the VAT. The DRC does not affect whether or not VAT is recoverable. It is worthwhile considering the DRC rules at the outset of a project to ensure that the correct party holds the sums equal to VAT when they are due to account to HMRC. This should avoid unexpected payments being required either to HMRC or between the parties.

How does the DRC affect PBSA or BTR?

Although the majority of PBSA and BTR construction costs are zero-rated for VAT purposes and so fall outside of the rules, the DRC rules apply to construction of commercial or non-residential parts of the development. In a PBSA context this could include work to build an onsite shop or bar. For BTR it could catch a mixed-use development with office or retail space. Where the DRC applies to part of the contract for works the usual rule is that it then applies to the whole of the construction works. However, in practice HMRC may disregard supplies within the DRC that are less than 5% of the value of the supplies for the whole contract. There is a further exemption from the DRC rules for “end users”. An end user is the party who will use or make supplies of the building, such as a university or other PBSA operator letting rooms to students or the landlord of a BTR mixed-use development. VAT on supplies of construction services made to an end user is accounted for in the usual way - the contractor receives payment of the price plus VAT and accounts to HMRC for that VAT. To fall within the exemption, the “end user” must notify the supplier in writing that they are an end user (in practice, the necessary end user statement can be included in a contract between the parties).

How does the DRC affect PBSA or BTR?

Although the majority of PBSA and BTR construction costs are zero-rated for VAT purposes and so fall outside of the rules, the DRC rules apply to construction of commercial or non-residential parts of the development. In a PBSA context this could include work to build an onsite shop or bar. For BTR it could catch a mixed-use development with office or retail space. Where the DRC applies to part of the contract for works the usual rule is that it then applies to the whole of the construction works. However, in practice HMRC may disregard supplies within the DRC that are less than 5% of the value of the supplies for the whole contract. There is a further exemption from the DRC rules for “end users”. An end user is the party who will use or make supplies of the building, such as a university or other PBSA operator letting rooms to students or the landlord of a BTR mixed-use development. VAT on supplies of construction services made to an end user is accounted for in the usual way - the contractor receives payment of the price plus VAT and accounts to HMRC for that VAT. To fall within the exemption, the “end user” must notify the supplier in writing that they are an end user (in practice, the necessary end user statement can be included in a contract between the parties).

If the DRC applies what are the practical implications?

Many PBSA and BTR projects will fall outside the DRC rules. For those that do not, where the DRC rules work as anticipated at the outset of the project there should be no cash flow issues. Difficulties can arise where the wrong party accounts for the VAT. Considering the DRC at the outset should ensure that the party accounting to HMRC for VAT holds the sum equal to VAT. For example, if the DRC applies, payments between contractors should be net of VAT. This should avoid unexpected payments being needed to HMRC, which could disrupt the cash flow of the businesses. All parties in the supply chain must be aware who is liable to account for VAT on each supply, to avoid errors and penalties for incorrect VAT accounting. In particular, the end user should take care to notify its contractors in writing to ensure that it does not take on a DRC VAT accounting obligation. The DRC rules should not trigger additional costs if correctly applied. Instead, the danger comes where parties are not used to applying them and are not aware that the rules catch their supplies.

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