From 6 April 2024, there has been a welcome change to the Construction Industry Scheme (CIS). By way of recap, the CIS is a tax collection mechanism operated by HMRC which ensures tax is properly accounted for on payments made to sub-contractors carrying out construction work. Consequently, it allows contractors to deduct money from sub-contractors’ payments and pass it directly to HMRC.

One of the unforeseen and unintended consequences of the CIS, (which was introduced to principally prevent cash in hand payments for construction work) has been complications which have arisen where a landlord makes a financial contribution to a tenant on the grant of a lease. Such payments are usually made to assist tenants with their fit out works as an inducement to enter into a lease.

Unfortunately, in some circumstances under the CIS, landlords were deemed to have been “contractors” and were required to make tax deductions to the “inducements” which resulted in tenants receiving contributions of up to 30% less from what they were expecting.

Therefore, the inclusion of such payments within the CIS has resulted in a disproportionately high compliance burden for all parties concerned; hence, the changes to reduce such administrative burden.

From 6 April 2024 the changes to the CIS are that payments made by a landlord to a tenant will be outside the scope of the CIS, where:

  • the payment is made by or on behalf of the landlord;
  • the person receiving the payment is a tenant or prospective tenant of the landlord (this includes sub tenants);
  • the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter a lease;
  • the tenant that occupies or will occupy the property will carry out the construction operations itself, or a third person is contracted to carry out the construction operations; and
  • the payment is for construction operations relating to works intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease.

Whilst this is certainly good news caution however is still advised. If the tenant is carrying out works which benefit the landlord, then CIS could still apply. For example if a tenant carries out work outside of its demise which will benefit the landlord, then such works may be still be caught by the CIS scheme.

In a recent BPF webinar, Lisa Walker Head of CIS policy at HMRC was asked a question on this topic. The enquiry was if a tenant carries out works to the roof of a building that it will occupy under a 25 year lease, would that not be for the benefit of the tenant? The answer was no – HMRC would consider that the landlord benefits because of the long term effect on the landlord’s interest. It should however be stressed that each case will be judged on its own merits and if in doubt, you should seek detailed advice and/or contact HMRC for a ruling. A link to the webinar can be found here.

Overall, this change to CIS is a welcome benefit for both landlords and tenants.

If you would like to discuss how these changes may impact your asset or real estate portfolio, please contact Clayton Beerman or any other member of the Property team or Brenna Baye of the Construction team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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