The VAT Reverse Charge for the Construction Industry Scheme – Are you ready?

From 1 March 2021, businesses within the Construction Industry Scheme (CIS) must record, report and pay VAT under the new VAT domestic reverse charge rules.

This change affects both contractors and subcontractors and the supply of certain kinds of construction services in the UK.

Under the new rules, VAT registered subcontractors who provide a service and any related goods to a VAT-registered contractor who is CIS-registered no longer need to account for the VAT.

Instead, it is the contractor or developer who will account for the VAT as an input tax, as if they made the supply to themselves.

For reverse charge purposes, consumers and final customers are called end users. They are businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.

The reverse charge does not apply to supplies to end users where the end user informs a supplier or building contractor that they are an end user. This should be done in writing to maintain accurate records.

HM Revenue & Customs (HMRC) has defined a list of construction services that the new reverse charge rules apply to, which can be found here.

Where a mixed supply is made containing a reverse charge and ‘normal element’ then you should apply the reverse charge to the entire supply.

You will need to make changes to your invoicing and accounting procedures to take the reverse charge into account, but this may differ depending on whether you are a contractor or subcontractor.

You should also consider the cash flow implications on your business of moving to the new regime, as there may be ways to mitigate the impact.

The reverse charge will apply to all jobs completed on or after 1 March 2021, but it may also apply to work that was commenced before this date but completed afterwards.

Determining when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment.

Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise, the existing VAT rules apply.

These new rules are mandatory – you cannot opt-in or opt-out, or only apply it to certain invoices – which is why you should seek help now if you believe you are likely to be affected.

Link: The VAT Reverse Charge

Don’t forget to claim home working tax relief

Due to the ongoing restrictions of the Government’s Coronavirus response, millions of UK workers continue to work from home.

Many may not be aware that they can claim tax relief for additional household costs if they are required to work from home regularly, either for all or part of the week.

This tax relief is not available to those who choose to work from home, only those that must do so.

This tax relief has been designed to cover additional costs, such as heating, metered water bills, home contents insurance, business calls or a new broadband connection.

A worker may also be able to claim tax relief on equipment used in their role, such as a laptop or mobile phone. Details of this can be found here.

However, the tax relief available does not cover costs that would stay the same whether a person was working at home or in an office, such as mortgage interest, rent or council tax.

Workers can either claim tax relief at a rate of:

  • £6 a week from 6 April 2020 (for previous tax years the rate was £4 a week) – no evidence is required to make this claim.
  • the exact amount of extra costs incurred above this weekly amount – this will need to be evidenced with receipts, bills or contracts.

Taxpayers get tax relief based on the rate at which they pay tax. For basic rate taxpayers (taxed at 20 per cent), for example, claiming £6 a week would mean they receive £1.20 per week in tax relief.

Employees can claim this relief by clicking here. They will need to use or set up a Government Gateway ID using their National Insurance number and information from their P60 form.

 Link: Claim tax relief for your job expenses

Consultations on future of Companies House could see filing deadlines slashed

A set of consultations on the future of Companies House published in December 2020, include proposals for mandatory digital filing, requirements to tag accountants digitally with IXBRL and shortening filing deadlines to three months for public companies and six months for private companies.

The Department for Business and Industrial Strategy (BEIS) is also seeking feedback on extending the powers of Companies House to allow it to undertake further checks on filings before they are added to the register, with the authority to reject them where necessary.

Finally, BEIS is consulting on banning corporate directors, meaning only individuals could hold the position of a company director. At the moment, companies are only required to have a single individual director.

There is no guarantee that any of the proposals being discussed will be implemented and, if they are, it is likely to take some time.

Lord Callanan, the Minister for Corporate Responsibility, said: “Today’s proposals set out further detail on our far-reaching reforms to ensure the Companies House register is fit for the 21st century – allowing us to crack down on fraud and money laundering while providing businesses with greater confidence in their transactions.”

Link: Companies House reforms could cut filing deadlines

Business insurance rates are on the rise

The impact of the pandemic has been felt in many different ways. Some of the effects have been quite immediate, but now many businesses are starting to see how the events of the last year are affecting their annual business insurance rates as well.

Before COVID-19 struck, there were already a number of factors adversely impacting the insurance industry and the market has steadily deteriorated during the last year. Beyond the pandemic, the industry has also been affected by:

  • Changes in legislation
  • A sharp rise in UK property rates
  • Flood and storm damage claims
  • Rising reinsurance rates and reducing capacity
  • Lower interest rates

The combined effect of these issues and COVID-19 has meant that many insurers are now looking to increase business insurance premiums in the year to come.

With many businesses already struggling with cost and cash flow management issues, a sudden increase in insurance rates could damage their ability to recover later in the year.

To combat some of the issues listed above, the insurance industry is reacting. One such area is specialist insurance for those in high flood risk areas, which uses a very practical approach.

If a business has previously been flooded, is at risk of flooding or has flood insurance in place, a new product has been created that is essentially a drain pipe attached to the outside of the premises.

When water levels reach a pre-agreed height on the drainpipe, the insurance policy pays out a pre-agreed sum of money immediately.

This new type of policy is not based on damage costs, like a traditional policy, and can be used as flood insurance or as cover for the excess on existing flood insurance.

This is one of several new insurance products on the market designed to reduce premiums, which is why businesses need to assess their current level of cover and the costs involved.

Link: Property insurance costs to keep rising in 2021

Independent commission argues against annual wealth tax but advocates a one-off charge

An independent commission established last spring by the London School of Economics, the University of Warwick and the Economic and Social Research Council to analyse proposals for a wealth tax has rejected an annual tax but has advocated a one-off charge.

The commission comprises senior academics from the universities involved as well as tax barrister, Emma Chamberlain.

While Chancellor, Rishi Sunak, has previously rejected the idea of a wealth tax, the commission’s independence means that the idea may gain traction in the coming years.

In rejecting the idea of an annual wealth tax, the commission argues that such a levy would “have higher administrative costs relative to revenue than a one-off tax, which means that it is currently not feasible” considering the lower tax thresholds.

It goes on to note that “at very high levels of wealth, the extent of these responses remains uncertain. Some responses could be mitigated by careful design, but others would be more difficult to resolve.”

Instead, the commission argues for substantial reforms of existing taxes on wealth instead of “minor tinkering”. They suggest this approach would be more efficient economically and less costly to administer.

In contrast, the commission advocated a one-off charge to help repair the public finances following the pandemic, arguing:

A well-designed one-off wealth tax would raise a total of £260 billion at a rate of five per cent over £500,000 per individual or £80 billion at a rate of five per cent of £2 million per individual, payable at one per cent per year over five years.

The report goes on to say that such a measure should not be pre-announced in order to prevent forestalling but that deferrals should be permitted where taxpayers are constrained in their liquidity.

The commission says that such a charge would be preferable to increasing taxes on work or spending.

Link: The Wealth Tax Commission

HMRC issues new warning over lockdown fraudsters

Within hours of the Prime Minister announcing a new national lockdown in England, HM Revenue & Customs (HMRC) has issued new warnings after it received reports that fraudsters were attempting to dupe taxpayers by pretending to be the tax authority.

Throughout the last year, criminals attempted to scam businesses and individuals out of money by sending fake HMRC correspondences related to COVID-19.

According to the latest reports, a number of scam text messages are now being sent out, informing people they are entitled to receive a grant from the Government as a result of the latest national lockdown.

One such scam message reads: “HMRC: The third lockdown has been announced. Our records show you have been issued a grant of £240 to help during this period.”

Taxpayers who receive the text are then redirected to a website designed to mimic GOV.UK, which asks them to enter the personal and financial details to receive a grant.

As part of the scam, individuals are asked to provide their card details, information it states is necessary “to confirm and deposit the calculated amount”.

Although the Government has announced £4.6 billion of grant funding for businesses during the latest lockdown, this funding is not applied for online in this way.

In response to the latest reports, HMRC has said it will never send any texts to people regarding a tax refund, rebate or grant. People can, therefore, safely assume such correspondence is a scam.

Instead, those who think they may be eligible for grant funding or other COVID-19 financial support should seek professional advice so that they can make the necessary applications.

Link: Avoid and report internet scams and phishing

VAT – Post-Brexit arrangements

The latest guidance on VAT on imports and services to and from the EU is complex and businesses need to account for this in their trading.

To help we have provided a brief summary below, but we highly recommend you seek additional advice.

Import VAT 

Goods that move into the UK from the EU from 1 January 2021 onwards will be considered imports, meaning import VAT will be payable and customs declarations will need to be made.

Businesses must account for VAT on all goods imported using a postponed accounting system. This means that import VAT is accounted for and paid via the usual VAT return, which will lead to an improved cash flow position for many businesses.

This applies to all goods imported by VAT registered importers to the UK, including those from the EU. In most cases, import VAT should be recoverable by businesses.

Accounting for import VAT on your VAT return

Businesses have to account for import VAT via their VAT return under the postponed accounting system if the goods they import are for use in their business.

A business must include its EORI number starting with ‘GB’ on its customs declaration and its VAT registration number if it is needed.

It can then account for import VAT on its VAT return when it submits a declaration that releases those goods into free circulation from one of the following special customs procedures:

  • customs warehousing
  • inward processing
  • temporary admission
  • end use
  • outward processing
  • duty suspension.

A business can only account for import VAT on their VAT return once they release excise goods for use in the UK – also known as ‘released for home consumption’.

If the business imports goods that are not controlled into Great Britain from the EU, between 1 January and 30 June 2021, they must also account for import VAT on their VAT return, even if they delay the customs declaration or use a simplified customs declaration to make a declaration in their records.

Deferring VAT

New rules for VAT deferment apply in Great Britain, which allow businesses that import goods regularly, to apply for a deferment account to delay paying most customs charges, including import VAT.

Through this account, a business can make a single payment each month via direct debit instead of paying for each consignment separately.

The scheme is open to importers or customs agents and freight handlers that work for importers and have an approved deferment guarantee or waiver in place.

Regardless of the method of accounting for VAT on imported goods, checks to ensure that the data on the customs declarations is accurate will continue to be highly important for VAT purposes, for all imports.

Consignments of value below £135 

Imported goods in a consignment not exceeding a value of £135 (€150), excluding specific excise goods and gifts, will not be subject to import VAT at the border and will be subject to sales (supply) VAT instead.

This will end the £15 VAT exemption thresholds previously known as low-value consignment relief and VAT will now be charged on the goods as if they were supplied in the UK and accounted to HM Revenue & Customs on the UK VAT return.

This means that businesses selling goods to be imported into the UK with a value not exceeding £135 will be required to charge and collect any VAT due at the time of sale.

For UK VAT registered businesses importing goods in a consignment not exceeding £135 in value that has not been charged VAT at the time of purchase they can account for this VAT on their VAT return under the usual reverse charge method.

Place of supply

Businesses must determine the country where a supply takes place for VAT purposes so that they know where VAT due is payable.

Businesses should be aware that they may continue to create VAT liabilities in other EU Member States. This may mean that businesses in the UK require multiple EU VAT registrations within each member state that they trade within.

Reclaiming VAT in the EU

Currently, UK firms incurring VAT in EU countries can claim VAT back (subject to national rules) via HM Revenue & Custom’s dedicated refund portal.

That arrangement will remain in place until 31 March 2021, after which time, there is currently no provision in place to claim for VAT incurred in 2020, under the terms of the Withdrawal Agreement.

Impact on services

Post-Brexit there should be minimal impact on the supply of services. Business to business services are treated as though they are supplied where the customer belongs and that customer must account for the local VAT.

This will mean that for UK service suppliers they will continue to not charge UK VAT. For business to consumer supplies, UK VAT generally applies and this will also remain the same.

When receiving services, UK businesses may still have to apply a reverse charge to the receipt of services from non-UK suppliers. This ensures that there is no competitive advantage from sourcing services via non-UK suppliers.

Eat Out to Help Out compliance checks underway

More than 84,700 food and drink establishments took part in the Eat Out to Help Out (EOTHO) scheme, according to the Treasury’s latest figures.

This resulted in 130,000 claims at the end of the scheme and is estimated to have cost the Treasury around £522 million.

The claims system was set up quickly by HM Revenue & Customs (HMRC), which did its best to prevent and address potential fraud.

However, HMRC now has announced that it is beginning post-payment compliance checks to recover money paid out incorrectly to businesses.

It is understood to be writing to around 4,000 businesses who it believes may have incorrectly claimed for the scheme.

These companies are being asked to check their claims are correct and could be asked to repay any money they weren’t eligible for.

As part of this check, some claimants are being asked to provide evidence of eligibility and their EOTHO calculations.

Claimants are being given just 60 days to respond to the letter before HMRC begins a formal compliance check, which could include having to pay statutory interest and penalties.

However, anyone who voluntarily repays any overpaid EOTHO payments, will not be charged a penalty. To report an overpayment, a claimant will need to complete an online disclosure form so that HMRC can calculate the amount that is owed.

If a business has been contacted but believes its EOTHO claims were correct they still need to contact HMRC in the allotted time or they may face a formal compliance check.

Link: Eat Out to Help Out scheme post-payment checks begin

HMRC publishes consultation on MTD for Corporation Tax

A new consultation has been published by HM Revenue & Customs (HMRC) which explores how the core principles of Making Tax Digital (MTD) can be applied to Corporation Tax (CT).

Within the new consultation document, HMRC has made it clear that MTD for CT is a means of tackling the underpayment of tax, especially among SMEs, where HMRC believes these are significant issues with errors. The tax authority has indicated that as much as £2.1 billion of the tax gap relates to CT.

Along similar lines to the existing MTD for VAT system, the proposals put forward a process that would require companies to maintain their records digitally and the submission of quarterly updates and a year-end tax return using MTD compatible software.

These quarterly submissions will focus on accounting data, with the option of including indicative changes to tax treatment. However, the usual annual tax return will be retained to allow HMRC to take a final decision on tax treatment.

The change will also affect business groups who may be allowed to operate their digital record-keeping on a group basis to manage obligations under quarterly updates and year-end tax returns.

This change would affect the majority of businesses, apart from the very largest and most complex companies with annual profits above £20 million, who will be exempt from making quarterly submissions. HMRC has indicated that other compliance procedures should ensure they pay the correct amount of tax without this measure.

Under the current proposals, it will be necessary to link accounting data directly to the tax return submission for all businesses.

The consultation states: “The digital records kept within the entity’s software may also form the prime record for their accounts. To comply with the obligations of MTD, accounting and tax adjustments relating to the period will need to occur either in that software or alternatively in linked software.”

It also indicates that it expects far more to be done via MTD compatible software, rather than by currently accepted processes, such as iXBRL tagging.

If implemented the changes explored in the consultation document would have a significant effect on the tax compliance process for companies, which is why HMRC has confirmed that MTD for CT will not become mandatory before April 2026.

Instead, it plans to hold a voluntary pilot from April 2024 to test the effectiveness of the system, before rolling it out more widely.

Although the current consultation ends on 5 March 2021, the tax authority has promised a further simplified consultation document for smaller companies in the months to come.

Link: Making Tax Digital for Corporation Tax

Virtual Christmas parties eligible for £150 annual function exemption

HM Revenue & Customs (HMRC) has confirmed that virtual Christmas parties will be eligible for the £150 annual function exemption that employers often put towards in-person festivities at this time of year.

Typically, employers can make use of the exemption for a Christmas party, as long as it is open to all employees, or all employees in a particular location and costs less than £150 per head.

The £150 exemption can cover entertainment, food and drink, transport and accommodation and VAT, as well as some other costs.

The amount applies to everyone attending, whether or not they are an employee, and is based on the average per person and not the actual amount spent on each person.

Because this is an exemption and not an allowance, the whole amount will come taxable if an employer spends more than £150 per head and not just the amount above £150.

In recognition of the substantial obstacles to holding an in-person function this Christmas, HMRC has now updated its manuals to confirm that the exemption can be put towards virtual events, such as where a hamper is provided to enjoy during the event.

Link: HMRC confirms virtual Christmas party exemption