Tax considerations for foreign entities operating a building site in the UK

Expanding construction operations into the United Kingdom represents a significant growth opportunity for international companies. However, entering the UK construction market also brings a complex landscape of tax, regulatory, and administrative requirements. Foreign entities must fully understand these obligations from the outset to avoid penalties, ensure compliance, manage cash flow, and maintain operational efficiency.

This article provides a comprehensive guide on the tax considerations for foreign entities operating a building site in the UK, including Permanent Establishment (PE), VAT, Construction Industry Scheme (CIS), Customs & Import Duties, Immigration, and Insurance.

If you would like to read more about CIS, you can refer to our Construction Industry Scheme (CIS): A Comprehensive Overview here.

Permanent Establishment (PE) & Corporation Tax

A Permanent Establishment (PE) occurs when a foreign company has a fixed place of business in the UK or conducts business in a way that establishes a taxable presence. Recognising PE risk is one of the most critical tax considerations for foreign entities operating a building site in the UK.

When a PE arises

Duration of project

Projects exceeding 6–12 months often trigger PE under UK domestic law and double tax treaties.

Physical presence

A site office, storage unit, or any fixed place where business operations are conducted can constitute a PE.

Dependent agents

Individuals in the UK who habitually conclude contracts on behalf of the foreign company may trigger PE status.

Implications of PE

• Liability to UK Corporation Tax on profits attributable to UK activities.
• Requirement to register with HMRC and file UK tax returns.
• Obligation to maintain local accounting records and comply with payroll tax requirements if employing workers locally.

Practical Tip

Companies should perform a PE risk assessment during project planning. For instance, splitting long-term projects into separate contracts or using third-party local agents can sometimes reduce PE risk.

VAT (Value Added Tax)

VAT is a complex yet critical component of tax considerations for foreign entities operating a building site in the UK. Non-compliance can lead to penalties and cash-flow issues.

Key VAT considerations

VAT registration

Any foreign company providing taxable construction services in the UK may be required to register for VAT, even if it does not have a PE.

Domestic Reverse Charge (DRC)

In many construction services, the customer accounts for VAT rather than the supplier. Misunderstanding DRC can result in invoicing errors or delayed payments.

Import VAT

Goods, equipment, or materials imported from outside the UK are subject to import VAT unless relief schemes apply.

VAT recovery

Foreign entities can reclaim VAT incurred on UK project expenses if properly registered.

Practical Example

 A foreign company importing scaffolding worth £200,000 must pay import VAT (currently 20%) upfront. By registering for VAT in the UK, this payment can later be offset against VAT charged to clients, reducing cash-flow impact.

Tip

Implementing robust VAT tracking software and consulting with UK VAT specialists ensures compliance and avoids fines.

Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) is a UK-specific tax regime designed to ensure compliance in construction payments. CIS is one of the most operationally significant tax considerations for foreign entities operating a building site in the UK.

How CIS works

• Contractors deduct tax from payments to subcontractors at rates of 0%, 20%, or 30%.
• Contractors must register with HMRC before paying subcontractors.
• Monthly returns must be submitted detailing payments and deductions.

Key requirements for foreign contractors

• Verify each subcontractor’s CIS status through HMRC.
• Apply the correct deduction rate based on registration status.
• Maintain accurate records to facilitate HMRC audits.

For subcontractors

• Register with HMRC to reduce deduction rates and ensure correct tax credit.
• Keep detailed records of payments and deductions for annual tax filings.

Example

If a foreign contractor pays £100,000 to a UK subcontractor with a 20% CIS deduction, £20,000 is withheld and submitted to HMRC. Incorrect deduction rates could result in penalties or disputes.

Tip

Engage a UK payroll or accounting specialist to manage CIS compliance, particularly for projects with multiple subcontractors.

Customs & Import Duties

Many foreign entities import machinery, equipment, or materials, making customs and import duties a critical consideration in tax considerations for foreign entities operating a building site in the UK.

Key considerations

Import VAT and duties

Most goods imported from outside the UK are subject to both import VAT and customs duties.

Relief schemes

Options such as Temporary Admission, End-Use Relief, or Inward Processing Relief can reduce costs.

Commodity codes

Accurate classification is essential to avoid fines or delays.

Documentation

Full customs documentation ensures smooth clearance and reduces the risk of delayed shipments.

Practical Example

 Importing a £50,000 crane could involve 5% customs duty plus 20% import VAT. Using Inward Processing Relief could significantly reduce duties for temporary importation of machinery.

Tip

 Work with a licensed customs broker and plan imports in advance to avoid project delays.

Immigration & Workforce Compliance

Immigration compliance is a critical operational consideration. Projects cannot proceed without the legal right to employ workers.

Key points

• Foreign workers may require work visas or permits, depending on nationality and duration of stay.
• Employers must conduct Right-to-Work checks to avoid fines.
• Companies hiring non-UK nationals may need a sponsor licence to legally employ skilled workers.

Practical Example

Hiring 10 skilled electricians from outside the UK requires visa applications under the Skilled Worker route. Late planning can delay project timelines.

Tip

Incorporate immigration planning early in project timelines to ensure workforce continuity.

Insurance & Operational Compliance

Insurance protects companies against legal, financial, and operational risks. Adequate coverage is essential for foreign entities.

Key insurance requirements

• Employer’s Liability Insurance: Mandatory for all workers on-site.
• Public Liability Insurance: Covers third-party claims for injury or property damage.
• Contractors’ All-Risk (CAR) Insurance: Covers construction works, equipment, and materials.
• Professional Indemnity Insurance: Protects against design, planning, or advisory errors.

Practical Example

A minor on-site accident without liability coverage could result in litigation costs exceeding £100,000. Adequate insurance protects both workers and business operations.

Tip

Review insurance policies annually and align coverage with project scope and risk exposure.

Conclusion

Successfully operating a building site in the UK requires careful planning and understanding of tax considerations for foreign entities operating a building site in the UK. Key areas include:

• Permanent Establishment and corporation tax risk
• VAT registration and compliance
• CIS obligations for contractors and subcontractors
• Customs duties and import compliance
• Immigration and workforce planning
• Insurance and risk management

Foreign contractors who proactively address these areas are better positioned to deliver projects efficiently, avoid penalties, and achieve financial success. Engaging UK tax and legal advisors early in project planning is strongly recommended. At WellTax, we support foreign contractors throughout the project lifecycle, providing coordinated UK tax guidance to ensure compliance and effective structuring from the outset. You may find more information about the services we provide here.