The CIS was first introduced combating tax evasion within the construction industry. However, it also captured payments by landlords to tenants in respect of works carried out by or on behalf of tenants. When CIS was reformed from a paper-based system to a more modern online verification system in 2005, an attempt was made to limit the application of CIS to landlord to tenant payments by the inclusion of a new exemption - regulation 20 of the Income Tax (Construction Industry Scheme) Regulations 2005 (the Regulations). That exemption is limited to circumstances where the payment is (or would, but for consequent loss of capital allowances entitlement for the tenant under the contribution rules) be taxable in the hands of the tenant as a reverse premium. This unfortunately led to uncertainty over which payments fall within the exclusion – particularly where payments relate to Category A elements.

Following a period of representations from industry and professional bodies, a government consultation commenced in 2022. The new regulation 20A of the Regulations, which came into force on 6 April 2024 under the Finance Act 2024, is a product of this consultation process.

The hope for landlords and tenants alike was that the amendment would remove from scope most landlord to tenant payments and provide clarity. HMRC's guidance in respect of regulation 20A is set out in the CIS manual pages CISR14048 and CISR14049. This guidance states that following the introduction of Regulation 20A "most payments made for construction work by a landlord to a tenant will fall outside the scope of the CIS provided certain conditions are met." However "not all payments made by landlords to tenants are outside the scope of CIS", instead the conditions for the exemption must be considered carefully in each case and the CIS will continue to apply to landlord-tenant payments in some situations.

The conditions for exemption from CIS under Regulation 20A are as follows:

a) the payment is made by or on behalf of a landlord (which term is widely defined to include a person who has legal or beneficial ownership of the property and a prospective landlord under an agreement for lease);

b) the person receiving the payment is a tenant or prospective tenant of the landlord;

c) the payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease;

d) the tenant that occupies or will occupy the property will carry out the construction operations itself, or a third person will carry out the construction operations pursuant to a contract with the tenant; and

e) the payment is for construction operations relating to works intended primarily for the benefit and use of the tenant that occupies or will occupy the property under the lease.

Of these conditions, it is limb (e) which is likely to cause most difficulties in practice. The question of whether a payment relates to works intended primarily for the benefit and use of the tenant appears on its face to have some overlap with the question of whether a payment is treated as a reverse premium (which, as noted above, is already outside the scope of the CIS). HMRC's guidance provides certain examples of where the condition would be met, and where it would not be met. However, as is usual with HMRC's guidance, there are many grey-areas which might not fall neatly within those examples and so a commercial judgment-call will be required in light of the specific facts or circumstances. Some key take-aways from the guidance are:

• substantial structural works are likely to fall on the wrong side of the line; and
• works to common parts are likely to be problematic, though if a tenant is the primary user, there might be grounds to say the works are nevertheless primarily for the benefit of that tenant.

Limb (d) might potentially also throw up some issues in practice. In particular:

• there is a mismatch between a tenant which does the works itself and a tenant paying a third party for works in that, in the former case, the tenant has to actually be an occupational tenant (this may well be a deliberate attempt to minimise the potential for contrived arrangements to come within the exemption, though it seems overly-cautious if so);
• on a strict reading, it might be interpreted as not covering a circumstance where there is further sub-contracting by the tenant's contractor and HMRC's guidance in CISR14048 is a little confusing on this point, though it is likely HMRC are simply making the point that the CIS will apply as normal between the tenant's contractor and its sub-contractors;
• HMRC's guidance states that landlords will need to "satisfy themselves" that there will be a contract in place for the work with a third person, suggesting that this could be evidenced by way of a warranty. It is not clear what exactly HMRC are concerned about here – is this just intended to apply in the context of a non-occupational tenant (in which case the landlord would need to know the tenant is not just carrying out the works itself, due to the mismatch referred to above) or does it represent a wider concern about whether there is actually a "contract" in place between the tenant and the person being paid to do the works, which might suggest a misunderstanding that a written agreement is required for a binding contract for works to arise.

In light of the above (and certain other ambiguities in the legislation and guidance), we would expect that – for the foreseeable future – payments between landlords and tenants will continue to have to be considered on a case-by-case basis in order to navigate the inherent complexities of the CIS.