At the Autumn Statement 2023, the government announced amendments to the Income Tax (Construction Industry Scheme) Regulations 2005 (the Regulations), including removing certain payments between landlord and tenants from the scope of the Construction Industry Scheme (the CIS).
Those amendments will come into force on 6 April 2024, having been laid before the House of Commons on 8 March 2024.
What was the concern?
The CIS was originally introduced to protect revenue in relation to the construction sector, with significant non-compliance suspected as a result of cash-in-hand payments. The CIS requires that “contractors” who make payments to “subcontractors” for works to withhold tax on those payments and pay that withheld tax to HMRC. Subcontractors can be paid gross if they apply for “gross payment status”.
A particular area of difficulty to date has involved payments to tenants by landlords for what are generally “landlord works”. These payments were generally captured by the Regulations even though it has always been felt that the CIS was never intended to capture them. This has long caused significant issues for landlord and tenants when negotiating leases and agreements for leases.
How do the amendments improve the position?
The amendments to the Regulations exclude payments between landlord and tenants from the scope of the CIS if certain conditions apply:
- there is a payment by or on behalf of a landlord to a tenant or prospective tenant;
- the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease (i.e., an agreement for lease);
- the tenant that occupies or will occupy the property will either carry out the construction operations itself, or will enter into a written contract with a third party to carry out those works. This means the amendments will apply to tenants in situ as well as incoming tenants;
- 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. This means that the works undertaken by the tenant do not necessarily have to be to the tenant’s demise. This is crucial for the regulations to have the intended positive effect, given that often works undertaken by tenants might relate to parts of the building which are close to, but not part of, their demise.
Whilst the CIS will still need to be considered where there are payments between landlord and tenants, it is expected that these amendments will ensure that, in the majority of cases, the CIS will no longer be the commercial headache it is so often been. The changes are therefore welcome and timely.
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