It is all too easy for landlords and tenants not to realise that their deal can fall foul of the Construction Industry Scheme (CIS) requiring contractors to withhold tax from sub-contractors, designed to make sure that sub-contractors income tax is paid.
How does this happen? – A landlord can be deemed to be a contractor when they spend over an average of £1,000,000 a year for three consecutive years on construction operations.
What constitutes a construction operation? – This is quite wide and includes all usual construction works and even painting and decorating etc.
What are the implications for landlords and tenants? – Where an agreement for lease provides for the tenant to carry out works at the landlord's cost, the arrangement could fall within the CIS if the landlord is a contractor (e.g. because of its history of spending money on construction operations). In those circumstances, the tenant would be a sub-contractor for the purposes of the CIS. For the tenant to receive its money gross the parties need to comply with the CIS, and we have written a longer client alert on this which you can read by following this link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.