Usually the tenant will employ a subcontractor to carry out the work for them, instead of carrying out the work themselves. If they are carrying out their own works, the tenant must register for CIS as a subcontractor or receive payment under deduction of tax and claim it back from HMRC. CIS rules capture actual construction operations when a tenant employs a subcontractor.
However, when a tenant carries out the work themselves, it is the relationship between tenant and landlord that can add extra administrative costs and can affect businesses looking to expand into the UK, as they cannot register under CIS without a trading history.
This is currently being considered by HMRC's construction forum and they welcome any evidence and thoughts on this subject from those in the relevant industry.
VAT on dilapidations.
DWF have previously reported on this topic here. HMRC have recently issued guidance that applies from 1 April 2022 on the issue of dilapidation payments. They have now clarified that dilapidation payments should not ordinarily be treated as further consideration for the supply of a lease, meaning that dilapidation payments should not be subject to VAT. HMRC have stated that they have come to this view, as it is the lease which creates the obligation to make such dilapidation payments.
The obligation to make a dilapidation payment is not inevitable, rather the lease creates an obligation to return the property in the agreed state and it is the default on this obligation that gives rise to the requirement to make a dilapidation payment. They have however said that this is not a clear cut rule and that they may depart from this view if "in individual cases they find evidence of value shifting from rent to dilapidation payment to avoid accounting for VAT". In other words, if HMRC consider rent subject to VAT has been reduced to dilapidations, they may investigate. It is always worth taking advice on this issue both at the stage where the lease is being drafted and also where a lease is being terminated.
Therefore, when there is a termination of a lease, both the landlord and tenant should ensure that dilapidation payments are kept separate from any other payments made.
Introduction of residential property developer tax (RPDT)
This is a 4% levy that applies to the trading profits of companies arising from the development of UK residential property in accounting periods ending on or after 1 April 2022. This is meant to apply over a 10 year period, partly to fund the cost of remedying unsafe cladding on high-rise residential buildings.
Residential property for RPDT includes " A building (or part) that is designed or adapted, or is in the process of being constructed or adapted for use as a dwelling".
The legislation also provides that the activities of designing, seeking planning permission and constructing or adapting will be residential property developer activities even if, at the time they are carried out, the residential property developer no longer owns an interest in the land, provided that these activities were planned or anticipated at the time when the RP developer ceased to own the land (and they are not carried out on wholly non-residential land).
RPDT is payable at the rate of 4% of a residential property developer's taxable profits for the relevant accounting period.
The tax will apply to companies with profits arising from UK residential property development but will only apply if the group’s profits from that activity exceed £25 million per year. This will be achieved by providing a £25 million annual allowance for each group to use against their profits for a year. Where this allowance is not exceeded, there will be no need to report residential property development profits.
For more information on the topic, please contact one of our experts below.