Changes to the UK’s Construction Industry Scheme

Why should I read this?

From 6 April 2024, various changes to the Construction Industry Scheme (CIS) will become effective. These changes broadly relate to (i) strengthening the requirements for gross payment status; and (ii) excluding many landlord to tenant payments from the scope of the CIS.

The changes to the CIS are implemented through a combination of:

• section 35 of the Finance Act 2024 (which received Royal Assent on 22 February 2024), which amends section 66 and Schedule 11 of the Finance Act 2004; and
• the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024 (SI 2024/308) (which were made on 5 March 2024) (the CIS Amendment Regulations 2024), which amend the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) (the CIS Regulations 2005).

Gross payment status

From 6 April 2024, gross payment status for the purposes of the CIS may be cancelled on the grounds of fraud in relation to PAYE, corporation tax or income tax self-assessment returns, or VAT (in addition to fraud in relation to the CIS). In addition, compliance with VAT obligations will be included in the compliance tests for gross payment status.

However, minor VAT compliance failures will not result in gross payment status refusal or removal, and any pre-6 April 2024 failure to comply with an obligation to account for or pay VAT must be disregarded for the purposes of a determination of cancellation of pre-6 April 2024 registration for gross payment status.

Landlord to tenant payments

Significantly, the CIS Regulations 2005 have been amended to include new Regulation 20A, which excludes many landlord to tenant payments from the scope of the CIS, provided certain conditions are met.

Regulation 20A provides that a payment under a construction contract is not a contract payment, and therefore the CIS does not apply to that payment, 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.

For the purposes of Regulation 20A, references to “landlord” include:

• the person who has legal or beneficial ownership of the property;
• the person by whom the lease is granted or was granted at an earlier time; or
• the person who will grant a lease in the future where they executed an enforceable agreement to enter into that lease.

The introduction of Regulation 20A is a welcome development. The inclusion of payments from landlords to tenants within the CIS was an inadvertent side effect of the CIS being widely drafted to encompass all construction obligations and any related contract payments. There has never been a high risk of abuse or loss of tax revenue in relation to landlord to tenant payments and their inclusion within the CIS has resulted in a disproportionately high compliance burden.

The new Regulation 20A will be particularly helpful to the large number of commercial landlords which fall within the wide definition of a “deemed contractor” under the CIS legislation, as a result of the size of their portfolio of properties and the general refurbishment works that they inevitably undertake across their portfolio. Without Regulation 20A, those landlords have had to apply the CIS in respect of their leasehold transactions and the fact patterns have invariably given rise to multiple complex issues resulting in significant time and finance costs for compliant taxpayers (large institutional landlords and large commercial businesses).

Helpfully, Regulation 20 of the CIS Regulations 2005, which excludes reverse premiums from the scope of the CIS, will be retained. (A published draft version of the CIS Amendment Regulations 2024 provided for Regulation 20 to be removed, but this provision was not included in the final version of the CIS Amendment Regulations 2024, as a result of responses to HMRC’s technical consultation on the draft regulations, which included a response submitted by Eversheds Sutherland.)

What should I do?

Sub-contractors which need to rely on gross payment status to enable relevant payments to them to be made without deduction under the CIS should ensure they meet their VAT compliance obligations, in order to obtain and retain gross payment status following the changes to the CIS legislation.

Although the new Regulation 20A will exclude many landlord to tenant payments from the scope of the CIS, it will not apply to all such payments. Parties to landlord to tenant payments which are potentially within the scope of the CIS should take legal advice regarding whether Regulation 20A will apply to those payments and regarding how, where appropriate, the payments should be structured and appropriately documented to ensure they fall within Regulation 20A.

What else do I need to know about the changes to the CIS?

HMRC’s guidance in relation to the changes to the CIS is currently awaited; this may have a significant impact on how the legislation is applied in practice.

For example, as explained above, one of the requirements for a payment under a construction contract to be excluded from being a contract payment for the purposes of the CIS under Regulation 20A is that “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”. The way in which HMRC interpret the meaning of works “intended primarily for the benefit and use of the tenant” will be significant; if HMRC’s interpretation is too narrow, HMRC may argue that many landlord to tenant contributions do not, in practice, fall within Regulation 20A and are therefore within the scope of the CIS, which would considerably diminish the value of the new Regulation 20A. We anticipate that the reinstatement provisions in the relevant lease will be important when considering whether works are “intended primarily for the benefit and use of the tenant”.