What has happened?
On 5 May 2026, HMRC changed its internal guidance to state that the construction industry scheme (the “CIS“) may apply where a contract “funds construction operations”, even if the party providing the funds is not itself a construction business. Until now, it has been widely accepted that conventional development finance arrangements (namely, those that did not contain elements where a lender would get a stake in the development being funded) fell outside the CIS.
Seemingly following industry input HMRC has now further updated its internal guidance to note that “Pure financing arrangements (including lending, providing finance and grant funding) fall outside the scope of CIS”.
What’s the concern?
HMRC’s revised wording of 4 June is a welcome clarification. Following the 5 May update, the concern was that loan drawdowns under pure real estate financing arrangements could be captured by the CIS. This would mean that lenders under such facilities could be treated as “contractors” and borrowers as “subcontractors” by virtue of entering into them.
What the 4 June update does not help with however is the treatment for CIS purposes of lenders / institutional funds / investors who require an element of control over how a development is undertaken. For these entities, there is a still a risk that they could be treated as “contractors” and their borrowers as “subcontractors” under the CIS regime.
What the changes in guidance show is that the core position has not necessarily flipped, but the risk perimeter has moved and HMRC’s lens has sharpened.
Why does this matter?
For lenders / investors / landlords / funds who are “contractors” this would lead to administrative hassle – they would need to register as contractors with HMRC, file CIS returns and face additional HMRC scrutiny. As contractors, they would also be subject to the new April 2026 anti-avoidance measures which have been brought in to tackle CIS fraud within payment chains. There is also the question of whether lenders could be retrospectively liable for penalties on historic loan drawdowns where they did not make CIS withholdings.
If borrowers were to be viewed as “subcontractors” as a result of the guidance changes, this could lead to cash flow issues if lenders start making CIS withholdings of up to 30% on their drawdowns for onward payment to HMRC. Making CIS withholdings on direct payments to subcontractors could lead to contractual disputes unless the ability to do so is baked into the finance and building contracts.
What do you need to do now?
As a first step, lenders / investors / funds should review their current financing arrangements and consider whether they could be viewed as anything more than ‘pure financing arrangements’. If there is a risk that this would be the case, they should consider whether CIS-ready processes (contractor verification and deduction mechanics) should be embedded into their arrangements (both existing and future). If any concerns arise as a result of that review, do not hesitate to contact a member of our real estate development and finance teams.
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