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Property Tax Bite - “Tax Day” – Possible reforms to the Construction Industry Scheme

Property Tax Bite – “Tax Day” – Possible reforms to the Construction Industry Scheme

Last Thursday 27 April was “Tax Administration and Maintenance Day”, which involved the publication of various consultations and proposals on tax measures, and the promise of more consultations to come.

Of most of interest to those advising on property tax matters was the publication of a consultation on proposed reforms to the construction industry scheme (CIS) rules.

The CIS rules are of broad application, with limited exclusions. Broadly, they can be in point whenever there is a contract which includes or relates to “construction operations” (itself very widely defined, covering almost anything to be done to a building in the UK) where one party (the contractor) pays another party (the subcontractor) and the latter is either carrying out or answerable to the contractor for the carrying out of the construction operations. Even if the contract only relates to construction operations in part, if it is within the scope of CIS, all payments from the contractor to the subcontractor under it may be liable to the operation of CIS.

Contractors have to verify the status of subcontractors under the CIS, and make deductions from payments if the subcontractor is not registered at all (30% deduction), or registered but not with gross payment status (20% deduction). The subcontractor is then entitled to set deductions off against its own tax liabilities, but being within the CIS means compliance and cashflow burdens, and of course the risk of not spotting that it applies, which brings additional risks for contractors.

The consultation considers, amongst other things:

• adding VAT compliance to the matters relevant to determining whether a subcontractor is entitled to obtain, or maintain, gross payment status for CIS. HMRC will no doubt hope this will drive better VAT compliance as well as tightening up the CIS gross payment requirements themselves; and

• of real interest to those advising on property transactions, taking payments from landlords to tenants (for works undertaken by the tenant) outside of the scope of CIS.

On the latter point, typically when considering this issue in practice, careful analysis is required to determine whether the payment in question relates, broadly, to “Cat A” or other landlord works, which would be within CIS, or “Cat B” / pure tenant fit-out works, in which case usually the payment should be outside CIS due to the reverse premium exemption. Removing the need to consider this distinction by taking both types of payments outside CIS would therefore be a welcome change.

The consultation closes in July, and as yet there is no set date by which any proposed reforms would take effect, but we will update further if it becomes clear that these reforms are going ahead.