Many a switched-on landlord will already be familiar with the perils of the Construction Industry Scheme. The Scheme, designed rather like PAYE to place the burden of tax collection on those employing building contractors, casts its net sufficiently wide that contributions made by landlords to the cost of works carried out by tenants will often be caught. When this happens, any payments made by the landlord (for CIS purposes, the “contractor”) to the tenant (the “subcontractor”) must be made subject to a withholding of tax, unless the tenant is registered under the Scheme for gross payment, and save where the payment in question is considered to be an “inducement”.

Commercial landlords will often be aware that (in broad terms) if their average annual spend on construction works is in excess of £1m they will be “deemed contractors” for the purposes of the Scheme. They may dutifully apply the Scheme when, under Agreements for Lease, they are contributing to the cost of tenant’s works which go beyond fit-out – such as when a tenant agrees to carry out Category A works on the landlord’s behalf. Equally, they may know that the likes of the frequently-given contributions to carpets and floor boxes will tend to be regarded as inducements – thus falling outside the scope of CIS (and also VAT).

It is critical to note, however, that for carpet and floor box contributions to qualify as inducements the landlord must not be getting anything ‘in return’, beyond the tenant’s agreement to enter into the lease. If the lease being granted includes an obligation requiring the tenant to yield up with the carpets or floor boxes in place, or contains rent review provisions which seek to rentalise their presence, that can be enough to preclude inducement status. The effect then is that – even in the absence of an Agreement for Lease – the Scheme must be applied, the tenant’s registration status verified with HMRC and the carpet and floor box contributions paid subject to the appropriate deduction. VAT will also be payable.

HMRC’s approach to the Scheme and landlords remains an area to watch, but in the absence of specific dispensations or revised guidance, getting this wrong can result in painful penalties and compliance issues for the landlord. It pays to be alert to the full reach of the Scheme – and certainly not simply to brush it under the carpet.