Reforming The Construction Industry Scheme – All change for landlords and tenants from 6 April 2024

From 6 April 2024 most payments made between landlords and tenants will be outside of the scope of the Construction Industry Scheme (the CIS) when The Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024 come into force.

In our Insight "Reforming The Construction Industry Scheme – An Effective Painkiller at Last?", we explained the background to the CIS and the bear trap it created for normally tax compliant landlords and tenants if they fail to withhold tax from payments for works.  The Government announced its intention to reform the CIS to address this problem in its Autumn Statement 2023.

Some argued that all payments between landlords and tenants should be removed from the scope of the CIS, but the Government feared creating a loophole which could be exploited by those attempting to avoid a regime that, according to the Government, protects £8.6 billion of tax revenue a year.

Our previous Insight examined the first draft of the new regulations and we explained some points of uncertainty and possible practical difficulties that would have resulted from them. Thankfully the Government has listened to feedback on the draft and produced revised regulations that take a substantially different approach which resolves many of those issues.

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 agreed in connection with a lease or an enforceable agreement for lease.
• The tenant that occupies or will occupy the property will carry out the works obligations itself or a third party will carry them out pursuant to a contract with the tenant.
• The payment relates to works intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease. 

Care will need to be taken to ensure payments do in fact fall within the new exemption. This is because there remains uncertainty around how works will be assessed to be “primarily for the benefit and use of the tenant”.  The very fact that a landlord is prepared to contribute to the cost of tenant works may suggest that the landlord will derive a benefit from them – particularly if there is no requirement for the tenant to reinstate at the end of the term. Further guidance from HMRC would be welcome on this point.  In the meantime, if there is any doubt, tax specialist advice should be sought as to whether CIS deductions ought to be made.

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