As explained here, the construction industry scheme ("CIS") was introduced to prevent perceived tax evasion in the construction industry. It is a type of withholding at source, like pay-as-you-earn, whereby parties who make payments for construction services (contractors) may be required to deduct income tax from payments to those who perform the services (sub-contractors). The CIS only applies to labour costs; no deduction is required in relation to payments for building materials.
The consultations
On Spring Tax Administration and Maintenance Day 2023, the Government published the consultation 'Construction Industry Scheme reform', proposing compliance and simplification changes including in relation to the CIS treatment of payments from landlord to tenants, both in terms of clarity as to which payments are exempt from the CIS, and whether more payments should be exempt from the CIS. Landlords tend to err on the side of caution and apply the CIS where there is any doubt. This means that the tenant has to register as a subcontractor and will receive payment under deduction, which affects their cashflow. Tenants are therefore being brought within the scope of the CIS, possibly unnecessarily. In November 2023, HMRC confirmed the intended policy was to "remove the majority of landlord to tenant payments from the scheme".
HMRC subsequently consulted on the terms of its proposed amendments to the CIS, seeking technical feedback on the draft regulations.
The new regulations: the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024
From 6 April 2024 payments made by landlords to tenants will be specifically excluded from the scope of the CIS if:
- the payment is for works obligations pursuant to a lease or an agreement for lease;
- the tenant that occupies or will occupy the property will either carry out the works obligations themselves or will contract with a third party to do so; and
- the works that are the subject of the payment are for the primary benefit and use of the tenant.
HMRC has published guidance on the new regulation. Landlords and tenants will be disappointed by the scope of the regulation and the narrow interpretation HMRC has placed on "primary benefit". Where the works affect the fabric or structure of the building, or where other tenants or the landlord could benefit in more than an incidental way from the works, HMRC will not consider that the "primary benefit" test has been met. The result will be that the majority of "Cat A" payments will still be within the scope of the CIS.
What will this mean in practice?
Payments that relate to the incoming tenant stripping out the outgoing tenant's fit out works, or are a new works obligation arising on a rent review or lease variation, will now clearly be outside the scope of the CIS, which many landlords and tenants will welcome. However, payments in relation to works which would have been on the borderline of the CIS previously — particularly where the tenant is carrying out works that would otherwise be the landlord's responsibility — will likely still require detailed technical advice as to the CIS position. Some landlords will continue to withhold in cases of doubt, leaving tenants with cashflow shortfalls, administrative costs, and maintaining the unsatisfactory status quo ante.
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