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Fitting Out

QUESTION: My client is entering into a new lease, and the landlord will be contributing to their fit-out costs. The landlord says these costs come under the construction industry scheme (CIS). Is this correct?

In most cases this will no longer be the case. CIS is a tax deduction scheme, and a person paying another for construction operations may be required to make a deduction under the CIS.

The term ‘construction operations’ is widely defined, and is likely to include most fit-outs. As such, many landlord fit-out contributions have been with the CIS, whether or not the tenant is involved in the construction industry. However, changes made on 6 April this year now mean most contributions fall outside the CIS. This is likely to be the case as long as the payments are truly for tenant fit-outs, as opposed to a payment for works that would normally be the landlord’s responsibility.

Even if the tenant is undertaking more than just true fit-out works, the landlord only has to consider applying the CIS if its business includes construction operations or if its average annual expenditure on construction exceeds £1m.

Nonetheless, if CIS applies, further changes made on 6 April ease some of the associated red tape. Previously, the tenant had to register under the CIS before the landlord could make the payment. It may receive the payment, subject to higher tax - 30% instead of 20%. But this can be set against monthly payroll tax.

Finally, don’t forget that if the tenant is going to employ another person to do the fitting out, it will need to consider whether it must operate the CIS in respect of payments it is to make.

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