Landlords: Carrying out Building Work on Your Property? – What You Need to Tell Us

In short

If your company is paying builders, plumbers, electricians or a main contractor to do work on a property it owns, please get in touch before you make the first payment.

The main issue is the Construction Industry Scheme (CIS), which may require you to hold back tax from what you pay your contractors and send it to HMRC, with a return every month. It is not difficult once it is set up, but it is expensive to fix late.

Part 1: The Construction Industry Scheme (CIS)

What it is

CIS makes the person paying for building work responsible for deducting tax from the builder’s labour charge and paying it to HMRC. The builder then claims it back on their own tax return. It sounds like the builder’s problem, but it is not, the responsibility is yours. If you should have deducted and did not, HMRC can ask you for that money on top of what you have already paid the builder. One property company recently ended up with a bill of over £383,000 this way, and its defence that it had read HMRC’s website and thought it was fine did not wash. Kalinga Holdings Limited v The Commissioners for HMRC – Find Case Law – The National Archives

Does it apply to you?

Two things need to be true.

One: you are paying someone else to do the work. This covers building, extensions, repairs, demolition, decorating, and installing heating, wiring, plumbing or drainage. It does not cover your architect, surveyor or planning consultant if they are only doing design work, and it does not cover work done by your own employees or directors through the payroll.

If a director, shareholder or family member carries out building work and invoices the company for it rather than being paid through the payroll, that payment can fall within CIS like any other. Please mention it to us if that is how you are doing things.

Two: the work counts as development rather than ordinary repairs. This is the part that catches people out, so it is worth reading carefully.

If you are doing up a property to let it, redecorating, new kitchen and bathroom, rewiring, new windows, general repairs, you are a landlord, and CIS only kicks in once your construction spend passes £3 million. Most landlords never come close, so most never need to worry about it.

If you are developing, buying to do up and sell on, building something new, or doing a substantial conversion; you are a developer, and there is no spending limit at all. CIS applies from your very first payment, even if it is a few hundred pounds.

Here is roughly where the line falls:

The “usually no” answers assume your construction spend stays below £3 million in any rolling 12-month period. If you are anywhere near that, speak to us.

By “substantial or radical” we mean things like structural subdivision, extending into the loft or rear, moving walls and staircases, or a planning change of use. Replacing a kitchen or bathroom or fitting fire doors and locks to an existing layout, usually is not. If you are unsure which side of the line you are on, ask us that is exactly the sort of case where it is worth a quick check.

Doing several of these projects across a portfolio also points towards the “developer” side, even if each one is small on its own.

Settle your status before you start paying

It is important that a business decides its CIS status before making payments to which the CIS deductions could apply. If you are in doubt as to whether the work you are undertaking is that of a developer or an investor, you can call the CIS helpline on 0300 200 3210 and request to speak with a technician.

Do let us know if you go down this route and please let us know what HMRC advise as it is useful to have on file.

One thing that does not help

Using a single main contractor who hires all the trades themselves does not take you out of CIS. Your payment to that contractor still counts, and they are still your subcontractor. It does make life a lot simpler, one person to check, one line on each monthly return, and the paperwork for everyone below them is their responsibility but you still need to be registered if applicable.

Part 2: What is involved if CIS applies

Four things, and we can handle all of them for you:

Register. You will need a CIS contractor registration and a PAYE scheme in place before you make the first payment.

Check each builder with HMRC. Before you pay someone for the first time they need to be verified. HMRC will tell you to either pay them in full, deduct 20% or deduct 30% if they are not registered. You cannot skip this just because the builder says they are CIS registered.

Deduct from labour only. Take off the VAT and what the subcontractor paid for materials, plant hire and fuel the rest is labour and that is what you deduct CIS tax from.

File monthly. A return by the 19th of each month and any money you have deducted paid to HMRC by the 22nd if paying online (the 19th if you are paying by post). You still need to file in months where you deducted nothing and in months where you paid nobody at all. Penalties for late returns build up quickly.

A grey area: change of intention after refurbishment

One of the tricky scenarios that comes up regularly is where a landlord purchases a property, carries out refurbishment, and fully intends to let it out, but then sells it without ever letting it. Circumstances change: the project is no longer viable, the market has moved, or an offer to sell comes in that is simply too good to pass up.

In these scenarios, the bare facts look like the landlord is flipping the property. From a CIS perspective, HMRC’s position on this specific scenario is not entirely clear, but in substance, the landlord is acting as a property investor, not a developer.

We have reached out to HMRC for their view on these circumstances, and we will update this guide as soon as we hear back.

Do you need help?

Then get in touch before the next payment goes out, and tell us:

• what the work involves, and whether it changes the use of the building or the number of units in it
• roughly what it is all going to cost
• whether you are using one main contractor or paying trades directly
• whether you are keeping the property or selling it

Once we have the above, we can confirm the best course of action. If your company is required to register for CIS, we can of course deal with the setup and the ongoing monthly compliance for you.

One last thing.

If the work involves anything more than routine repairs and redecoration, please treat CIS as a live question and review your position before you commit. The boundary between landlord work and development work is a genuinely fine one, and it is much cheaper to settle it at the planning stage than to unpick it afterwards.

If you would like to read more: HMRC on who CIS covers and HMRC’s guidance on developers vs landlords.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG