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.

Simplification of Inheritance Tax

The Office of Tax Simplification (OTS) have been tasked with carrying out a review of Inheritance Tax (IHT) with a view to simplifying how the tax operates. IHT is perceived to be complicated and currently yields a relatively small amount of tax compared to income tax and national insurance.

There are a number of reliefs and exemptions currently available which may be withdrawn or simplified as a result of the review. Major changes to the tax are probably a year or so away and we will keep you updated as the review progresses. It may be necessary to review your Will and plans for passing on your business and estate when we see any new rules.

Making Tax Digital delayed further

HMRC have confirmed that no further MTD for business changes will be brought in before 2020 at the earliest.

The Treasury set out its revised priorities for current digital transformation projects, to make room for the additional demands on its resources of work to upgrade customs systems in preparation for Brexit.

The HMRC statement notes that the convergence of business taxes from the current range of IT systems onto a single system will now happen at a slower pace. This will slow the creation of the single account for all business customers.

For individuals, the introduction of further digital services will be delayed, with progress on simple assessments and real time tax code changes put on hold for the time being.

Note that the introduction of VAT reporting under MTD is still scheduled to commence in April 2019 for those VAT registered businesses with turnover over the £85,000 VAT registration threshold.

June / July 2018 Important dates

Date What’s Due
1/06 Corporation tax for year to 31/8/17 (unless pay quarterly)
19/06 PAYE & NIC deductions, and CIS return and tax, for month to 5/6/18 (due 22/06 if you pay electronically)
1/07 Corporation tax for year to 30/9/17 (unless pay quarterly)
5/07 Last date for agreeing PAYE settlement agreements for 2017/18 employee benefits
5/07 Deadline for agents and tenants to submit returns of rent paid to non-resident landlords and tax deducted for 2017/18
06/07 Deadline for forms P11D and P11D(b) for 2017/18  tax year
19/07 PAYE & NIC deductions, and CIS return and tax, for month to 5/7/18 (due 22/07 if you pay electronically)
31/7 50% payment on account of 2018/19 tax liability due

May/June Tax dates!

Date What’s Due
01/05 Corporation tax payment for year to 31/07/17 (unless quarterly instalments apply)
 

19/5

PAYE & NIC deductions, and CIS return and tax, for month to 5/05/18 (due 22/05 if you pay electronically)
01/06 Corporation tax payment for year to 31/08/17 (unless quarterly instalments apply)
19/6 PAYE & NIC deductions, and CIS return and tax, for month to 5/06/18 (due 22/06 if you pay electronically)