The CIS (Construction Industry Scheme) is a mandatory tax deduction scheme applicable to payments to contractors and subcontractors. Here we consider it in the context of Scottish commercial leases, in particular landlord contributions to tenant works.

What is the Construction Industry Scheme (CIS)?

The CIS is a mandatory tax deduction scheme that obliges contractors to make tax deductions from payments made to subcontractors under construction contracts.

The CIS was originally introduced to tackle tax evasion within the construction industry where cash-in-hand payments are commonplace. At first glance, the CIS might not appear relevant to organisations outside the construction industry but the broad framing of the CIS rules means that they can also apply to landlords and tenants.

Why is the CIS relevant to commercial leases?

In commercial lettings, it's not uncommon for tenants to carry out certain CAT A works (works that are usually the landlord's responsibility e.g. flooring, lighting or M&E) in exchange for a financial contribution from the landlord. In practice, it's often more time and cost effective for landlords to delegate the responsibility for completing CAT A works to their tenants. This approach also allows tenants to ensure that those works can be effectively integrated within their own CAT B fit out works.

The CIS defines the terms "contractor" and "subcontractor" broadly: a "contractor" is someone who pays for construction services and a "subcontractor" is someone who provides those services for payment. Where landlords make payments to tenants for construction services (i.e. to complete works on the landlord's behalf), those payments could be caught by the CIS, if certain qualifying criteria are met.

What is the impact for commercial landlords?

If payments are caught by the CIS, landlords must make deductions from the payments made to tenants at the rate of 20% or 30% (depending on the tenant’s CIS registration status) unless the tenant is registered for "gross payment" under the CIS. Recent changes to the CIS have removed the situations where the CIS will apply in landlord – tenant situations, but it still can be an issue in some cases.

Any deductions made are to be paid by the landlord to HMRC and will be treated as an advance payment of the tenant's Pay As You Earn (PAYE) liabilities.

For unwary landlords, this creates a compliance risk as the obligation to make deductions and pay those to HMRC sits with the landlord. Tenants may also face unexpected cash flow problems, particularly if the deduction is large but the tenant's PAYE are relatively small. For unsuspecting landlords and tenants, the CIS can present unintended consequences.

Parties can choose to structure their letting deals to try and avoid payments being caught by the CIS e.g. by landlords granting additional rent-free periods in lieu of capital contributions or making capital contributions without any obligation on the tenant to complete certain works. However, these incentives are unlikely to reflect the commercial intentions of the parties and landlords will generally want to avoid granting unusually long rent-free periods (which might look out of place in the market) or carrying the risk that tenants fail to carry out the works that the landlord has "paid for".

When will the CIS apply?

The CIS is potentially relevant whenever tenants are obliged to undertake works in exchange for a payment from the landlord. The CIS applies to payments made by a landlord if: (1) the landlord is a CIS contractor; and (2) the payments do not qualify for exemption.

The term "CIS contractor" includes mainstream construction industry contractors as well as "deemed contractors" - businesses that don't operate a construction business but whose spend on relevant construction works is more than £3m in the previous 12 months. This broad framing could include commercial landlords.

Under previous rules, payments were only outside the scope of the CIS if they were made as a pure inducement in respect of tenant fit-out works only. If a tenant undertakes CAT A works instead of, or as well as, tenant fit-out works, all payments made by the landlord under the same agreement for lease could be caught by the CIS.

Recent changes to the CIS

With effect from 6 April 2024 regulations were introduced to remove most payments by landlords to tenants from the scope of the CIS. In good news for landlords and tenants, these changes mean that the majority of payments made by commercial landlords to their tenants now fall outwith the scope of the CIS provided that certain conditions are met. This change significantly reduces the compliance and administrative burden for landlords.

These sorts of payments no longer fall within the scope of the CIS where: (1) the payment is made for works that have been agreed in connection with a lease or an enforceable agreement for lease; (2) the tenant carries out the works directly or contracts a subcontractor to carry out the works; and (3) the works are primarily for the benefit and use of the tenant.

Despite the positive changes, not all payments made by landlords to tenants fall outside the scope of CIS. The requirement that any works are primarily for the benefit and use of the tenant means that payments made in relation to works carried out to common parts are likely to remain within the scope of the CIS. Whether or not a payment relates to works intended primarily for the benefit and use of the tenant will need to be carefully assessed on a case-by-case basis.

Landlords should also be wary of HMRC's guidance which states that landlords will need to "satisfy themselves" that a contract is in place between the tenant and a third party for the works. Landlords will therefore need to satisfy themselves that such a contract exists before assuming that any payments fall outwith the scope of the CIS.

Key takeaways

Landlords should consider the potential impact of the CIS when entering into agreements for lease where tenants are obliged to undertake works in exchange for a payment from the landlord.

Whilst recent changes to the CIS rules bring most of these payments outwith the scope of the CIS, payments made by landlords to tenants should be carefully considered on a case-by-case basis. Specialist advice should be sought at an early stage to help determine whether such payments will be caught by the CIS and to ensure that appropriate provisions are included in any agreements for lease.


Jordon Reid


Scott Bell

Senior Solicitor