The Construction Industry Scheme is a mandatory tax deduction system where contractors withhold tax from payments made to subcontractors.
To streamline the Construction Industry Scheme (CIS) and reduce complexities in the construction sector, the UK government is set to introduce changes to the CIS scheme through the Autumn Finance Bill 2023.
The measures, expected to come into effect from 6th April 2024, are aimed at simplifying criteria for payment from commercial landlords to tenants.
The groundwork for these changes was laid with a consultation on CIS reform in April 2023, followed by a summary of responses in November 2023. Further changes were incorporated into the Autumn Finance Bill 2023.
Table of Contents
- What is the Construction Industry Scheme?
- When are commercial landlords defined as CIS contractors?
- How does the Construction Industry Scheme impact commercial tenants?
- When does the CIS apply?
- How will upcoming changes to the CIS change this?
- What will the impact of reforms to the CIS be for commercial landlords and tenants?
- How can Lawhive help?
What is the Construction Industry Scheme?
Under the Construction Industry Scheme, contractors take money from payments made to subcontractors and send it to HMRC. The money taken is considered an early payment towards the subcontractor’s tax and National Insurance.
Contractors are required to sign up for CIS. However, subcontractors don't have to register, but if they don’t, deductions from their payments are made at a higher rate.
In CIS terms, a contractor is someone paying for construction services, and a subcontractor is someone providing these services for payment. This means, in some circumstances, a commercial landlord may be defined as a CIS contractor and their tenant's CIS subcontractors.
When are commercial landlords defined as CIS contractors?
The CIS’ definition of contractor doesn’t just apply to regular contractors but also ‘deemed contractors,’ which are businesses that spend a significant amount on relevant construction works, on average, over three years.
This means that commercial landlords can be classed as ‘deemed contractors' and, therefore, have to give a percentage of the money they give to commercial tenants for construction work to HMRC.
How does the Construction Industry Scheme impact commercial tenants?
Right now, some payments from commercial landlords to tenants fall under the CIS.
If a commercial landlord is responsible for building works and pays a tenant to do things like fitting out their space or improving shared areas, the CIS rules may kick in, leading to a substantial deduction from those payments. This is because, in CIS terms, the landlord is seen as the contractor and the tenant is the subcontractor.
Likely, a commercial tenant won’t be registered with HRMC as a CIS subcontractor. So, the landlord has to deduct 30% from the payment to the tenant, which means the tenant receives 30% less of the payment but still has to pay the construction company that carries out the work the full amount.
While commercial tenants can reclaim the tax deducted against their PAYE and NIC liabilities, they might have to wait until they make their corporation tax payment to recover the full cost. Adding 30% to the landlord's contribution to make up the amount after tax can cause significant cash flow problems for tenants.
If a tenant is registered with HMRC for payment under deduction, the deduction is reduced to 20%. Or, if the tenant is registered as a subcontractor with gross payment status, no deductions will be made. However, this is not common for this to be on the radar of commercial tenants, therefore the 30% deduction applies.
When does the CIS apply?
The CIS may apply whenever a tenant signs a commercial lease with their landlord that involves the tenant doing construction work the landlord pays for.
How will upcoming changes to the CIS change this?
Upcoming changes to the CIS will remove most payments from commercial landlords to tenants from the scope of the CIS, simplifying things for businesses involved in landlord-tenant transactions.
The measure will update the Income Tax (Construction Industry Scheme) Regulations 2005, clarifying that a payment from a landlord to a tenant for construction work on the tenant’s property is not considered a construction payment. Therefore, it falls outside the scope of the CIS.
What will the impact of reforms to the CIS be for commercial landlords and tenants?
Both commercial landlords and tenants will benefit from one-time savings by implementing the proposed reforms.
Landlords will save on deductions, reporting, and payments to HMRC. Tenants will no longer need to register for the CIS or reclaim deductions.
How can Lawhive help?
At Lawhive, our commercial property lawyers help commercial landlords and tenants understand their rights and responsibilities.
Should you need help with a commercial property matter, you can access affordable legal advice and support quickly through our website. To get started, contact our legal assessment team today.