It is a wonderous thing when a government listens to a request from industry to tweak an irritating set of rules. It is an even more wonderous thing when the changes are published in draft with a consultation on them before they are implemented. But the zenith is when the comments from the consultation are listened to and the end resulting rule change is actually fit for purpose.
The irritating set of rules we are talking about is the construction industry scheme treatment of payments to tenants to do works. Taylor Wessing sent comments on behalf of our clients to the draft regulations and we are delighted that most of them have been taken forward into the new rules.
What are the changes?
Regulations were made last week introducing changes to the Construction Industry Scheme ('CIS') and taking the majority of landlord and tenant payments out of the scheme. The CIS is a withholding tax scheme, and if a payment is caught by the scheme, deductions must be made from it unless the recipient is registered for gross payment. Tenants carrying out works under agreements for lease and receiving payments from the landlord have historically been potentially caught by the scheme.
Previously, payments to tenants that were a reverse premium were outside the scope of CIS, however there has always been uncertainty over some payments from landlord to tenants for works and whether the works were for the benefit of landlord or tenant. When the works were for the benefit of the landlord and not a reverse premium so potentially caught by CIS, for example cat A works, the landlord would then need to consider if it was a deemed contractor and this might lead to the unnecessary burden of registering for the scheme and making deductions. The tenant would also have the option to register but with many not in the construction industry this was a confusing obligation. Therefore, it is welcomed that regulations have now been made that should result in most landlord and payments being out of the scheme. Payments from 6 April 2024 will be outside of the scheme if:
- 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
- the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease
- the tenant that occupies or will occupy the property will carry out the construction operations itself, or a third person will carry out the construction operations pursuant to a contract with the tenant, 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.
There will still be some blurry areas, for example if a tenant it doing works to an area outside of its demise, is it doing works that are primarily for its benefit and use of the property under the lease. In addition, landlords will need to be satisfied that either the tenant is carrying out the work itself or there is a contract in place with a third person to do the work. However, these changes are a very welcome development that should make life simpler for landlords making payments to tenants for construction obligations and for tenants receiving such payments.
