HMRC consults on excluding landlord contributions from the UK Construction Industry Scheme

The UK government has published a consultation on three areas to strengthen and simplify the Construction Industry Scheme (CIS), with one of the main focuses on the removal of unnecessary administrative burdens on landlord and tenant relationships.

The consultation considers whether HMRC should add value-added tax (VAT) to the list of taxes it refers to when undertaking the statutory compliance test for receiving or keeping gross payment status – and seeks views on how adding VAT could be given effect and potential consequences.

As well as landlord and tenant payments, it also looks at how multiple reporting requirements by some groups may also cause unnecessary administrative burdens. The consultation closes on 20 July and also invites views on whether there are other areas of the CIS causing unnecessary administrative burdens.

The consultation is part of a package of technical tax policy proposals published on 27 April to modernise the tax system, tackle non-compliance, make the tax system fairer for taxpayers and work better for traders.

CIS reform

Moves to reform the CIS are not new. In the past few years, HMRC has been actively consulting on and slowly adopting changes to the CIS under the objective of simplification. Last year, following industry pressure, HMRC engaged with members of its Construction Forum with a call for evidence on the operation of the CIS in respect of landlord payments to tenants for category A works.

The main concern raised was the difficulty in distinguishing between category A (landlord works) and category B (tenant works). Broadly, landlord contributions attributed solely to category B works are treated as "reverse premiums" and fall outside of the CIS.

However, it was found that where there was any doubt of the type of works being undertaken by the tenant, landlords were acting cautiously when applying the CIS to their contributions to avoid making any errors and having to account to HMRC later for tax that should have been deducted.

Why does this matter?

CIS deductions can cause cashflow issues for tenants who are unable to register for gross payment status, which can result in the landlord having to withhold up to 30% on their contribution. Any tax withheld is reclaimed through the tenant's PAYE returns provided it has employees.

If the withholding is larger than the monthly PAYE liability of the tenant, or there is no PAYE liability to set off against, this can further impact the tenant's cash flow by at least several months, and often longer, before the withheld amount can be reclaimed. It also imposes an administration reporting burden on landlords.

What is the proposed solution?

HMRC has put forward a number of proposed solutions in the consultation to reduce the burden created by the CIS on landlords and tenants, including treating all landlord tenant contributions as reverse premiums and exempt from the CIS or excluding landlord contributions from the definition of "contract payments" under the CIS.

Both of these solutions would put an end to the current arrangements, which cause such confusion, and, in practice, would be simple to follow. However, given HMRC's concern that any blanket exemption may lead to manipulation of the scheme, HMRC has also proposed automatically providing tenants gross payment status as a sub-contractor.

This allows tenants to bypass the three-prong test (the business, turnover and compliance tests) to qualify for gross payment status and ensures the landlord pays any contribution gross. It still requires both parties to comply with the CIS and its reporting obligations and, potentially, does not resolve the unnecessary filing burden imposed by the scheme.

A contrary alternative

Alternatively – and contrary to requests made by landlords and tenants – HMRC has suggested proposals to leave the legislation untouched and to revisit the distinction between categories A and B works and provide better education to tenants on the impact of landlord contributions.

While this might provide clarity on the application of the CIS for landlords and tenants, without legislative reform there is a risk that careful consideration would still need to be given to any guidance published for each contribution and a cautious approach would continue to be taken by landlords wary of their tax compliance obligations.

Osborne Clarke comment

We welcome the government's proposals to simplify the CIS for landlords and tenants and reforming the current rules would be a positive action; however, care needs to be taken to ensure the proposed solution works from a practical perspective.

We will be responding to HMRC's consultation to address the specific queries raised and, if you would like to discuss the consultation and our proposed response in more details, please speak to one of our contacts.

This is the first in a series of Insights on the government's tax administration and maintenance proposals for Spring 2023. The next article will cover the proposals to modernise stamp duty on shares.