New CIS Regulations: Making CIS Work for Tenant Works

The latest changes to the CIS regulations will reduce the risk of withholding tax and the associated tax compliance burden when agreeing tenant's works and inducement arrangements.

The Income Tax (Construction Industry Scheme) Amendment Regulations 2024 (the 'regs') have been made and laid before the House of Commons, coming into effect on 6 April 2024. The regs have been revised and widened since the first draft was published for technical consultation in November 2023.

The new regulations retain Regulation 20 (reverse premiums) of The Income Tax (Construction Industry Scheme) Regulations 2005, and set out the criteria for the additional exemption against which a payment by a landlord to a tenant will not constitute a 'contract payment' and will therefore fall outside the scope of CIS:

A payment under a construction contract is not a contract payment if:

(a) the payment is made by or on behalf of the landlord,

(b) the person receiving the payment is a tenant or prospective tenant of the landlord,

(c) the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease,

(d) 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

(e) 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 this regulation, references to “tenant” include, where the property is sub-let, a sub-tenant, and 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.

What we think

The retention, rather than replacement of the existing Regulation 20 as previously proposed is welcomed, as this will still be a relevant exemption. As a recap, Regulation 20 is a regulation that provides an exemption for reverse premiums paid by a landlord to tenant as an inducement for taking a lease. In the common scenario of a tenant agreeing to undertake a package of works prior to taking occupation under a lease, the question of when a payment was a pure inducement and when it went beyond that often required a complex analysis.

The new exemption goes further and should make it easier in many cases to conclude that fit out works undertaken by a tenant are out of scope of CIS, thereby reducing compliance costs and the risk of inadvertent failures to withhold. There is still some ambiguity regarding the condition that the works are "intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease" though we understand that will be addressed at least in part through new HMRC guidance.

Overall, the changes are to be welcomed, particularly in light of other recent changes to the CIS regulations which make it more challenging for taxpayers to obtain and maintain gross payment status. By taking the majority of landlord to tenant payments out of scope of the CIS, this will focus the impact of these enhanced compliance rules on the part of the sector where there is a greater risk of loss of tax.

A Tax Information and Impact Note on the regs has also been published by HMRC.