Construction industry scheme changes

Regulations have been introduced to remove uncertainty and complexity on what payments made by commercial landlords to tenants are within scope of the Construction Industry Scheme (CIS) and which result in the majority of such payment falling outside the scope of the CIS. The measure is designed to reduce compliance and administrative burdens of the CIS by preventing tenants from falling with the scheme who would otherwise have fallen outside its scope.

The measures also contain measures in connection with the expansion of the statutory compliance test for being granted gross payment status (GPS) to cover VAT.

Background

In the 2023 Autumn Statement the government confirmed, following a consultation on the construction industry scheme, that a number of compliance and simplification proposals to the scheme would be introduced from April 2024. In particular, these included the introduction of regulations to remove the majority of payments from landlords to tenants from the scope of the CIS.

Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024

On 5 March 2024, the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024 (SI 2024/308) were made. These add a new Regulation 20A to the main CIS regulations which specifies that payments made by a landlord to a tenant for construction operations in connection with a lease or an enforceable agreement to enter into a lease are not contract payments and are, therefore, outside the scope of the construction industry scheme.

To fall within the scope of this exclusion, the payments must meet the following conditions:

• The payment is made by or on behalf of a landlord

• The payment is received by a tenant or prospective tenants (tenants include sub-tenants)

• The payment is for construction operations 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 construction works itself or contract with a third party to undertake the work

• The payment must be 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.

The definition of "landlord" encompasses a person with the legal or beneficial ownership of the property, who granted the lease or who will grant the lease.

In addition to the changes to the treatment of payments between landlords and tenants, the regulations also add contain exceptions to VAT compliance obligations for minor failures. This provision follows changes introduced in the Finance Act 2024 which expand the grounds for immediate removal of GPS for cases of fraud involving VAT, Corporation Tax Self-Assessment (CTSA), Income Tax Self-Assessment (ITSA) and Pay As You Earn (PAYE). The Finance Act also adds compliance with VAT obligations to the GPS compliance test, which must be passed by subcontractors to obtain and keep GPS. The amendments apply to GPS applications and compliance checks made on or after 6 April 2024. For existing GPS holders, VAT obligations before 6 April 2024 will not be checked as part of the compliance test.

Comment

The publication of the regulations and simplification of the operation of the CIS in relation to payments between landlords and tenants is very welcome. The pre-April 2024 rules created burdensome obligations and unnecessary registrations and the removal of these should reduce compliance burdens.

Under the pre-April 2024 rules, landlord and tenants have had to get comfortable that payments from the landlord to the tenant fall within the exclusion for "reverse premiums" in Regulation 20 of the main CIS regulations in order that they fall outside the scope of the CIS.  Whilst that was achievable for contributions made by a landlord towards the tenant's own fit out works, it was far more challenging in circumstances where a contribution was being made towards the tenant undertaking Category A fit out works.  This has led to prudent landlords operating the CIS on such contributions and tenants suffering the cost of CIS deductions - and the administrative burden and cash flow implications of having to reclaiming the amounts deducted - unless they can secure GPS before the relevant contribution is paid to them. 

Whilst the new exclusion under Regulation 20A should take most payments by landlords to tenants (or prospective tenants) for construction operations outside of the scope of the CIS, Regulation 20A is not a panacea.  The requirement that the payment must be for construction operations relating to works intended primarily for the benefit and use of the tenant means that a payment which relates to works on part of the landlord's wider estate (i.e. outside the property demised or to be demised to the tenant) is likely to fall outside the scope of the new exclusion and so remain within the scope of the CIS.

Finally, it should be noted that the new regulations do not affect the application of the CIS to payments by tenants to landlords for construction operations -- for example, where the landlord has agreed to undertake the tenant's own fit out works or to undertake so-called "tenant's requested modifications" to its own build.  It remains the case that these payments will usually fall outside the scope of the CIS, unless, for example, the tenant will be sub-letting part or the whole of the property to third parties or the nature of the tenant's activities mean that it is a so-called "mainstream contractor".  This is virtue of the exclusion in Regulation 24 of the main CIS regulations for payments in respect of property used for the purposes of the business of the tenant or another company in the same group.