Reforming The Construction Industry Scheme – An Effective Painkiller at Last?

  • Legal Development 22 February 2024 22 February 2024
  • UK & Europe

  • UK Real Estate Insights

The Construction Industry Scheme (CIS) has long presented a headache for unwary landlords and tenants. From April 2024 this is all set to change with new regulations designed to move most payments made between landlords and tenants outside of its scope.

Primarily intended to protect tax receipts in the arena of cash-in-hand construction work, the consequences of the CIS also extend to landlords and tenants in scenarios that many argue it was never intended to.  

Landlords are most at risk when they make contributions to tenants for works – a not uncommon scenario at the start of a tenancy. If the works go beyond an ordinary fit out and the landlord will derive a benefit (for example an increase in the value of its interest) then the contribution payment will often fall within the scope of the CIS. That means that the landlord must deduct and account to HMRC for tax at the rate of 20% or 30% (depending on the tenant’s CIS registration status) unless the tenant is registered to receive gross payments. The compliance risk falls squarely on landlords in this scenario, but tenants may also face unexpected cash flow issues as a result.  

It is possible to structure new lettings so that the CIS will not bite - for example additional rent-free periods or inducements without any tenant obligation to undertake works - but often the work-arounds don’t reflect the reality of the parties’ intentions and may leave landlords exposed if the works are not carried out.

In the Autumn Statement 2023, the Government announced that the CIS would be reformed and in December it issued draft regulations to specifically exclude payments from landlords to tenants from the application of the CIS if:

  • The payment is for works obligations as a consequence of a lease agreement – this will be a matter of fact.
  • There is a written contract between the tenant and the person undertaking the works. Landlords must therefore satisfy themselves that this exists before making any payments in reliance on the new regulations and tenants must ensure that formal contracts are in place in plenty of time.
  • The payment relates to works exclusively to parts of the property which the tenant will occupy under the lease agreement. This means that any works obligations to the landlord’s wider estate (for example a retained car park) will not be covered by the new exclusion.

The relevant date for the changes is the date of payment and so some payments will inevitably be due to tenants under agreements that anticipated that tax would be withheld under the CIS. In those scenarios, the new regulations would apply to payments instead.

The intention behind the new regulations is a welcome attempt at simplification and should hopefully remove many contribution payments from the scope of CIS. However, the need for written agreements to be in place and the restriction to works on areas occupied by the tenant will mean that care will need to be taken to ensure payments do, in fact, fall within the scope of the new rules. The limited scope of the new exception means that there remains a possible sting in the tail for an unwary landlord.

The limited scope of the new exception means that there remains a possible sting in the tail for an unwary landlord.


The draft regulations also remove the regulation under which reverse premiums from landlords to tenants (the inducement exception) fell outside of the CIS. There is a risk that not all payments covered by the old exception will be covered by the new rule, creating potential uncertainty. Some have questioned whether removing that safety net before the industry has worked through the application of the new regulations may be presumptive.

The government is reviewing the feedback it has had on the draft regulations, but it now seems inevitable that from April some form of painkiller will be available to landlords and tenants for the headache that is the CIS.   

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