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Matthew Hutton MA, CTA (fellow), AIIT, TEP, Author of Capital Tax Review,  highlights a potential problem for investors in residential property.

Context

The new Contruction Industry Scheme (CIS) commencing on 6 April 2007 has been well publicised.  While there is an exemption for owners having work carried out on their own homes, there is no such exemption for other residential property: a catch therefore!
 
Long-term investors will not need to register unless they fall within the ‘deemed contractor’ definition (which requires expenditure of £1 million a year over three years - unlikely!).
 
But 'small-time' property developers (eg those who buy a property and hire builders to carry out improvements prior to resale) will need to register as contractors and comply with the procedures when paying builders.
  
Registration also appears to extend to 'investors' who change their minds (ie they gain vacant possession and then hire builders to carry out improvements prior to sale).

Exchange of correspondence between Horwath Clark Whitehill LLP and HMRC

Letter to HMRC 5 February 2007

We have a number of clients owning residential property (which is not their own residence).

Most of these properties are held for investment purposes (ie the intention is to hold long-term for rent); from time to time such investors will carry out renovations/improvements using local builders. We have a few other clients who have bought property and are renovating it for resale, or are converting property (into flats for resale).

In the first case (holding property for investment purposes – a ‘property investor’), we assume that these clients would not need to register for the new CIS unless they came within the ‘deemed contractor’ definition. Do you agree?

In the second case, we assume that ‘property developers’ (even though this is not their main source of income) would have to register for the new CIS as they would be carrying on construction operations. Do you agree?

Thirdly, what is the position if a ‘property investor’ decides to sell a property, which was previously let, and before the sale carries out improvement work? Do they need to register under the new CIS for this particular project?

HMRC reply 21 February 2007

Going by the information that you have supplied, regarding your first two questions we can accept your interpretation of the new scheme. 

As far as question three is concerned we believe hat they would need to register in this case. 

(Contribution from Neil Bailey of Horwath Clark Whitehill LLP)

Comment

This is a curious example of one (new) tax regime having a disproportionate impact on ‘ordinary’ taxpayers.  But ‘forewarned is forearmed’.

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php

Matthew Hutton Conferences 2007

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