Institute backs removal of CIS deductions on landlord payments

The Chartered Institute of Taxation (CIOT) has backed proposals to remove tax deductions made on payments by landlords to tenants for construction works on properties.

The Construction Industry Scheme (CIS) is a revenue protection scheme that requires a contractor to deduct money from payments made to subcontractors in relation to construction work, which is then passed to HMRC as advance payment towards the subcontractor’s tax and National Insurance.

However, although the CIS is targeted at the construction industry, the scheme can also cover certain payments made by landlords to tenants to carry out building works, often in connection with repairs or improvement works ahead of the grant of a new lease.¹

The CIOT has previously called for such payments made by landlords to tenants to be removed from the scope of CIS and reiterated this² during a recent HMRC consultation.³

Colin Ben-Nathan, Chair of the CIOT’s Employment Taxes Committee, said:

“We believe that landlord to tenant payments should be outside the scope of CIS, provided they derive from the landlord-tenant relationship and any potential for abuse is evaluated and addressed.

“Landlords often make payments to tenants to carry out landlord works in non-construction sectors such as hospitality or retail, where tenants are also carrying out works at the same time to finish a building or to fit it out to their own needs. It’s a sustainable approach which co-ordinates work and avoids the need for tenants to strip out recently completed, but unwanted, landlord works.

“However, at the moment it does mean that a tenant whose business has nothing to do with construction either needs to register with HMRC as a gross payment sub-contractor or receive the payment with tax deducted, and then claim it back from HMRC.”

The CIOT says most tenants in these circumstances sub-contract the work they require and can find themselves having to pay their sub-contractors in full, despite receiving payment from the landlord under deduction of tax, leaving them with a cashflow shortfall.

Leigh Sayliss, Chair of the CIOT’s Property Taxes Committee, added:

“When the work is sub-contracted to third party building contractors, the rules operate as intended to capture actual construction operations, but it is the application of CIS between tenant and landlord for the same works that causes problems.

“The cashflow shortfall is a real problem for start-ups and inward bound businesses that may need to wait until the year end to get the deduction back.

“On top of this, there is an overall lack of clarity on what works fall within the CIS.  This gives rise to conflicts between landlords, who are increasingly being driven towards adopting an overly-cautious approach, wanting to apply CIS deductions by default, and tenants who need to minimise any deductions that may be made.

“The uncertainty means that landlords and tenants incur additional legal and administrative costs in negotiating what deductions the landlord may make – and then what should happen if HMRC question the negotiated position.”