Changes in VAT

Under new rules due to come in on 1 October 2019 builders, sub- contractors and other trades associated with the construction industry will have to start using a new method of accounting for VAT.

The measure is designed to combat VAT fraud in the construction sector labour supply chain which HMRC argue presents a significant tax loss. HMRC has now published draft legislation to introduce the Reverse Charge for Construction Services.

Under the proposed new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the reverse charge a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position. This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.

CONSTRUCTION WORK AFFECTED

The reverse charge will apply to a wide range of services in the building trade, including construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, and foundation works. The definitions have been lifted directly from the CIS legislation.

EXCLUDED WORKS

Professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape are not covered by the new rules. The draft legislation sets out other work to which the reverse charge does not apply.

It is hoped that the legislation and guidance will be finalized by October 2018 to allow businesses at least 12 months in which to make the necessary changes to systems. Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system.

 

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Death of a Sole Trader

When a person dies and trading ceases, the law provides for HMRC to require a representative for that person, such as the official appointee or executors of the deceased estate, to account for any outstanding returns or tax due up to the date of death. The representative does not become personally liable; his liability is restricted to ‘the extent of the assets of the deceased or incapacitated person over which he has control’, in the same way, that it would have applied to the deceased person. The representative is required to inform HMRC within 21 days of beginning to act.

If a representative is put in place, the regulations allow HMRC to continue to treat the representative as a substitute for the deceased taxable person, as above, until the estate has been finalised. HMRC’s guidance advises that by custom, personal representatives are allowed a year from the death in which to complete administration, including the payment of all debts and taxes. This does not necessarily mean that they must complete the task within the year, but HMRC would review the situation at this point. This is because the legislation allowing the representative to act as a substitute for the deceased taxable person effectively postpones the date of death for a limited time until some other person is on the register properly. If, after the ‘executor’s year’, the estate has not been finalised, then, for the security of the revenue and for administrative convenience, HMRC will seek to register the personal representative in his own right as the taxable person carrying on the business.

Alternatively, if, at the outset, it is likely that the representative will continue to be responsible for the business for the foreseeable future, HMRC will register that person in their own right immediately. Where this happens, or when a third party takes over the business, it is possible to transfer the VAT number with a VAT 68 as a TOGC, or a new VAT number can be issued.  The original VAT registration will be cancelled, and treated in the same way as any other registration cancelled based on ceasing to trade. Where the VAT number is not transferred, it is possible for HMRC to defer the date of deregistration to allow for any sale of assets and winding up costs to be included within the period of the VAT registration, while costs incurred after deregistration can be recovered via a VAT 427 post-deregistration claim.

Contact HMRC in writing as soon as possible to let them know of the change in circumstances, and give details of the executor(s)/representative(s) who will take responsibility for the continuation of the business and the completion and submission of the VAT returns.

Guidance can be found in VAT Notice 700: The VAT Guide – Section 26 and HMRC’s VAT Registration Manual VATREG42000.

The relevant legislation is contained in the VAT Act 1994, sections 46(4) and 46(5), and in the VAT Regulations 1995, regulations 9 and 30.

Brexit – from a VAT perspective

Unless all member states agree to an extension, the UK leaves the EU on 30 March 2019. The UK intends to leave the EU Customs Union, meaning the re-introduction of a UK-EU Customs border. A negotiated outcome of a Free Trade Agreement (FTA) with no customs duties imposed is still the most likely scenario. However, the prospect of no deal, or a very limited deal between the UK and the EU, is a real political possibility, resulting in the UK falling back on World Trade Organisation (WTO) rules in 2019; a “hard” Brexit.

Currently, as part of the EC, we are part of a single trading community and goods produced in the Community can move freely and seamlessly throughout all member states.

In addition to the VAT return, a business submits EC Sales Lists to show the sales that it has made to each of its VAT registered customers in other member states. It may also be required, dependant on thresholds, to submit Intrastat Supplementary Statistical Declarations, advising the value of goods that it has despatched to or acquired from other EC member states . There are no border controls or documentary checks to delay shipments.

Although we don’t have a crystal ball, post-Brexit there is likely to be a transitional period, after which the UK will be treated in the same way as any other non-EC country with export and import declarations replacing the current statistical declarations. Also, there may be additional documentation and licencing requirements to meet security regulations and health and safety standards that are checked at the border.

Goods arriving at the border can be subject to anything from document checks, to inspection, to actual testing of samples at the border, which may lead to delays. As a result, businesses may need to build in additional delivery time to alleviate the effect of these controls. It is useful to note here that businesses are also charged for checks. A physical examination of goods from port health authorities can cost a trader anywhere between £106 and £600 per container.

Sales to EC member states can still be zero rated (albeit as exports) provided evidence that the goods have left the country within three months is retained. A corresponding import entry will be required when the goods enter the EC, on which import duty and VAT will be due.

Similarly, when goods are received from the EC an import declaration will be required, with VAT due at the time of clearance unless the deferment is authorised.  This could cause cash flow difficulties.

The change in documentation may lead to increased costs as the data requirements for Customs are more extensive than for Intrastat, and there may be a need to upgrade current software and train staff in its use. If you use an agent for Customs declarations it can cost around £20 per entry.

With uncertainty over the UK’s post-Brexit cross-border regime and the length of any transitional period, this leaves businesses in a catch-22 situation.  Waiting until the end of the negotiation period may not leave much time to implement new systems before rules and trading arrangements change; on the other hand, until it is clear what the new regime will be it is difficult to know what changes to make.

ADVISORY FUEL RATE FOR COMPANY CARS

ADVISORY FUEL RATE FOR COMPANY CARS

These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 June 2018.

Where there has been a change the previous rate is shown in brackets.

Engine Size Petrol Diesel LPG
1400cc or less 11p

 

  7p
1600cc or less   10p (9p)  
1401cc to 2000cc 14p   9p (8p)
1601 to 2000cc   11p

 

 
Over 2000cc 22p

 

13p 14p

(13p)

Note that for hybrid cars use the equivalent petrol or diesel scale charge. However, it may be more beneficial to compute the actual cost.

You can continue to use the previous rates for up to 1 month from the date the new rates apply

EMI Schemes

HMRC had initially advised that EU State Aid approval for the Enterprise Management Incentive (EMI) scheme expired on 6 April 2018.  HMRC had applied to European Commission for fresh approval but, it was not received before 6 April 2018.  Therefore, as of 07 April 2018, any new options which have been granted may not qualify for the associated tax advantages.

Here is a link to HM Revenue and Customs related bulletin:

https://www.gov.uk/government/publications/employment-related-securities-bulletin/employment-related-securities-bulletin-no-27-april-2018

Whilst HMRC has not yet issued any statement, the European Commission has confirmed that it has recently granted the prolongation of EU State Aid for EMI schemes.  Please see the link below for HMRC approval.  The EU commission stated:

“The Commission’s assessment found that the prolongation of the measure is necessary to help UK SMEs attract and retain talented and skilled personnel.  It also found that the measure contains a number of safeguards, such as a cap on the value of the share options that can be subject to the tax advantage both at the employee and employer level, ensuring that potential distortions to competition are limited.  On this basis, the Commission concluded that the measure is in line with EU State aid rules.  Without prejudice to any provisions of the Withdrawal Agreement, which is under negotiation, this Commission decision only applies until the UK ceases to be a Member State.”

Here is a link to the announcement:

http://europa.eu/rapid/press-release_MEX-18-3803_en.htm

This may give a sigh of relief for clients that may have been left in limbo.  However, it is only valid whilst the UK is a member state.  The position may change post-Brexit and if you are thinking of implementing an EMI scheme, you may need to be proactive now.

Smart contracts

As blockchain technology continues to evolve, we are hearing more and more about so called “smart contracts”.

Smart contracts utilise blockchain technology in order to self-execute. A smart contract is an agreement between two people in the form of computer code. They run on the blockchain, so they are stored on a public database and cannot be changed. The transactions that happen in a smart contract are processed by the blockchain, which means they can be sent automatically without a third party. This means there is no other party to rely on in order to execute the contract.  The transactions only happen when the conditions in the agreement are met, so there are no issues with trust, people being available outside of office hours, etc.

Smart contracts can be used where transparent and immutable records are useful. This is why the technology has already found wide adoption in financial services. There is value in ensuring that records of financial transactions are kept verifiable and safe from tampering and fraud.

Companies that have started using blockchain technology include IBM, which has partnered up with companies such as Nestle and Unilever, along with stores such as WalMart in order to manage inventory of certain products.

At such a very early stage in the development of smart contracts i is difficult to know all the potential benefits smart contracts will bring to businesses. As with any new technology, smart contracts will mature, and we should begin to see shifts in how business is done as the technology becomes more main-stream.

Client relationships

It costs considerably less to maintain an existing client relationship versus winning a new client.

Creating more successful relationships with your existing clients depends on developing a broader and deeper relationship.

Business is personal – people choose to do business with people that they like. Those that develop successful, long-term relationships with their clients tend to become a trusted adviser to those clients. If you become a trusted adviser to your key clients, they are likely to come back to you for more business, send you referrals, seek your advice on strategic issues and pay their bills on time.

It takes a lot of time and effort to make client relationships work year after year. As such, you should ensure that you are focusing on developing the right relationships. Start by focusing on your key clients – those that send you the most work, have the potential to send more business your way and, most importantly, are profitable.

Once you have identified your key clients, create a 12-month plan which focuses on how you are going to develop that relationship. Focus on how you can add value, from the client’s perspective.

Schedule regular catch up meetings or calls with your client. If applicable, offer some free training sessions for their staff. Most importantly, make sure you understand your client’s expectations and ensure that you always deliver to, or exceed those expectations.

Focus on moving from being reactive to being more proactive. Your clients will value this and your business relationship should continue to prosper as a result.