The Construction Industry Scheme (CIS) was introduced in 1972. It has undergone a few revisions since then, with the last major revision applying from 6 April 2007.
On 27 April 2023, the government published a consultation on CIS reform. One of the items in the consultation included simplifying the treatment of payments made by landlords to tenants.
What is a Reverse Premium?
A landlord may make a payment to a prospective tenant to encourage that tenant to enter into a lease. Sometimes these payments can be for items which are considered to be the landlord's responsibility, which are generally referred to as 'finishing the building'.
A tenant will also have costs for fitting the premises out specifically for their own business requirements.
HMRC refer to works that are the responsibility of the landlord as category A (CAT A) works, and expenditure funded by the landlord for the benefit of the tenant’s business as category B (CAT B) works.
CAT A works may include raised floors and suspended ceilings (with a basic finish), basic mechanical and electrical services, fire detection services and smoke alarms, air-conditioning and ventilation (HVAC) and basic internal finishes.
CAT B works may include fully fitted kitchens and non-communal office amenities, partitioning; including meeting rooms, offices and breakout spaces, installation of IT and workstations, and providing all soft furnishings and non-communal staff facilities.
It is important to note that payments for CAT B works are specifically exempt from the CIS reporting and withholding obligations. These payments qualify as exempt from CIS as ‘Reverse Premiums’.
What is the issue with Reverse Premiums?
Making a distinction between CAT A and CAT B works can be difficult. As the landlord has an obligation to make the correct determination, any errors may lead to an under deduction of CIS. The consequence of an under deduction can include HMRC assessing the landlord for the under deducted CIS along with penalties and interest.
Where a payment is for a mixture of CAT A and CAT B works, then the entire payment is subject to CIS deduction.
Due to the difficulties in assessing whether payments are for CAT A or CAT B works, a landlord may act cautiously and apply CIS deductions to the payments unnecessarily, which can lead to cashflow issues for the tenant, who may not have a large enough payroll to offset the deducted CIS, and may therefore struggle to pay their subcontractors.
Making a distinction between CAT A and CAT B works can be difficult.
As the landlord has an obligation to make the correct determination, any errors may lead to an under deduction of CIS.
Change on the horizon?
The consultation closed on 20 July 2023 and the Chartered Institute of Taxation submitted responses to HMRC with suggestions for improvements, however, we now await the government’s formal response.
If you have issues with reverse premiums, please contact us to discuss how we can use our expertise to help clarify CAT A and CAT B works.
