Contributors
At long last, there is some good news for retail tenants and corporate occupiers. Until now, they have often found themselves involved in overcomplicated and time consuming negotiations to document simple payments from landlords after agreeing to carry out works to the space they are taking. It is usually more practical for tenants to do this, particularly if they have their own fit out contractors on site or want to retain control of costs and timings.
Where such payments related to what were generally regarded as "landlord works", such as repairs to the building (quite often the roof) rather than tenant fit out works, those payments used to fall foul of the Construction Industry Scheme regulations. With development not the core business of most corporate occupiers, many tenants are not registered under the Construction Industry Scheme. This would result in them having to receive payments for these works with tax withheld on payments. The additional drafting in legal documentation would then tend to delay transactions.
The good news for tenants is that since 6 April 2024 the Construction Industry Scheme regulations have been amended so that certain payments made by the landlord to a tenant for construction operations now fall outside the scheme and the issues we've described can be avoided.
The amendments to the regulations exclude payments between landlord and tenant from the Construction Industry Scheme if all the following conditions apply:
- The payment is made by or on behalf of the landlord and the person receiving the payment is a tenant or prospective tenant of the landlord
- The payment is for construction operations agreed in connection with a lease or an enforceable agreement to enter into a lease
- 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
- 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.
This common sense amendment should be seen as really helpful for retailers and corporate occupiers. They will now be able to carry out some landlord's works without any concerns as to whether or not they are registered under the Construction Industry Scheme.
Landlords have also welcomed the changes as it will simplify negotiations and the process for making payments to tenants in connection with works. Before landlords get too carried away, both parties need to ensure that the tenant is not carrying out works with a wider benefit, for example to common areas such as installation of a shower block or enhancement to public amenity space. Payments for these types of works are likely to be still caught by the scheme. It is therefore important when negotiating these works to ensure that they come within the new exclusion and that the works are confined to the areas let to the tenant.
Be aware that this Construction Industry Scheme simplification does not change the VAT position. It may still be possible for the tenant to be treated as supplying construction services to the Landlord, which will then remain subject to VAT.
