HMRC have recently updated their guidance on when a property investor would become a developer and thus fall within the definition of a mainstream contractor for the Construction Industry Scheme.
The effect of this is that you must register with HMRC as a contractor, verify each person/company you paid for labour (materials do not apply) and, following that verification, make payment either with no tax deducted (if the recipient has ‘gross status’) or deduct tax from the payment made of either 20% or 30%. A monthly return also has to be filed detailing any payment made and the amount of tax deducted.
As the tax deduction is from the person/company being paid for labour, there is no cost to the payer in tax terms. There is, however, additional admin to undertake, on a monthly basis, and in determining whether CIS applies for each supply.
The risks for non compliance can be severe. If HMRC determine that CIS should have been applied, then there will be harsh penalties but more importantly, if you should have deducted tax from payments made for labour, HMRC will seek to recover that tax from the payer. If may be possible to offset any tax paid by the recipient but there have been many cases whereby the recipient has not declared the income for tax purposes; or has but has gone bust prior to paying that tax.
HMRC guidance does not have force of law but it is a good indicator of how HMRC will view things. As you will have seen, the guidance is somewhat vague so it will be down to judgement on a case by case basis.
A general refurbishment or reconfiguration should not fall within CIS but at the other end of the scale, the conversion of an office block into flats most likely would in HMRC’s view. The more difficult assessment would be for those projects that fall somewhere in between. We can, of course, give our opinion to assist you but given that the guidance is vague, you will need to assess whether you are willing to take the risk of falling foul of it.
Our view would be that most conversions of a house into an HMO would not be caught as there is still one overall living space/dwelling before and after. Division of a property into flats (not just splitting the title) as a one off may not be caught but if done several times could fall under CIS. New builds and change of use conversions most certainly would be under the new guidance.
Please speak with your usual contact if you require assistance.