News & Insights

Construction Industry Scheme – consultation on reforms

HMRC has published a consultation on proposed amendments to the Construction Industry Scheme (CIS) on the treatment of payments made by a landlord to a tenant for construction operations: it’s time to have your input now!

The Autumn Statement delivered by the Chancellor of the Exchequer on 22 November 2023 included the proposed introduction in the Finance Bill 2024 of a reform of the application of the CIS on payments from landlords to tenants. HMRC has published its consultation to seek views on its proposed amendments to the relevant regulations.

The current position

The CIS was created to counter the informal arrangements believed to exist in the construction industry and its poor record of tax compliance. It places the burden on those making payments under a construction contract to deduct tax before making the payment (similar to the PAYE system). There are exclusions and different rates of tax applicable depending upon the nature of the payment and the status of the parties involved (parties can register with HMRC within the scheme, to receive gross payments).

Failure to comply with the regulations may result in either or both parties being fined.

The problem for landlords and tenants

One of the main areas of concern is where a tenant has agreed (usually in an agreement for lease) to undertake works (known as “construction operations”) at the cost of the landlord. If the construction operations are not solely tenant’s fitting-out works (and it can be difficult to separate what is and is not fit-out), the arrangement could be caught by CIS. That may result in the landlord having to withhold tax from the payment and ultimately the tenant not receiving from the landlord the full amount it was expecting, or both being in breach of the regulations (as mentioned above).

The proposed reform

The proposed reform intends to take payments from a landlord to a tenant for such construction operations outside the scope of CIS. The key conditions are:

  • the construction operations must relate exclusively to the parts of the property the tenant is occupying or will occupy, and
  • the tenant must have a written agreement with their contractor who will be carrying out the operations. In other words, CIS will still be applicable if the tenant is undertaking the construction operations itself.

Reform of this area of tax legislation is welcome and we await the outcome of the consultation with interest. You can register your views at [email protected]. The consultation period closes on 9 January 2024.

The contents of this article is not specific to any particular circumstances and does not amount to legal advice. If you have any particular concerns, you should consult your tax advisors.