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Numeric Accounting has offices in Salisbury, Wiltshire & in Dibden (near Hythe) in Hampshire. We offer a full range of professional accountancy services to businesses across the UK.

VAT Construction reverse charge – Are you ready?

THE NEW VAT RULES FOR CONSTRUCTION SECTOR START ON 1 MARCH 2021

New VAT rules are due to come into effect on 1st March which will impact on accounting for VAT for transactions in the construction sector. The new rules are called “the domestic reverse charge for supplies of building and construction services”.

Under the 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 new reverse charge system, the sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT, although they will identify the rate and amount of VAT due and notify their customer that the VAT must be accounted for by them on their VAT return. The sub-contractor will then be paid only the net value of the work done without the VAT.

If you are a sub-contractor, contractor, or both, but are not VAT-registered, the new rules with not affect you.

If you are a VAT registered sub-contractor… supplying services subject to the new VAT reverse charge rules, you will need to make this clear on your invoice to the contractor. HMRC has approved the following wording, and we suggest our clients use this.

“Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant rate as shown above”

VAT registered sub-contractors using Xero will need to use the Domestic Reverse Charge @ 20% & 5% (VAT on Income) rates when drafting and submitting their sales invoices. If these VAT rates are not visible, you will need to ‘switch’ these on by simply selecting the ‘Add Domestic Reverse Charge Rates’ within the Tax Rates function in Advanced Accounting. The software will then make sure the VAT element of the transactions is correctly omitted from the sales invoice and VAT Return.

If you are a VAT registered contractor… receiving supplies from the sub-contractor you will need to enter the VAT identified on their sub-contractor’s invoice in box 1 of your VAT return as well as claim this back in box 4 of the return.

VAT registered contractors using Xero will need to use the Domestic Reverse Charge @ 20% & 5% (VAT on Expenses) rates when processing their sub-contractor invoices. Again, if these VAT rates are not visible, you will need to ‘switch’ these on by simply selecting the ‘Add Domestic Reverse Charge Rates’ within the Tax Rates function in Advanced Accounting.  The software will then take care of the postings to the VAT Return for you.

WHO DOES THE REVERSE CHARGE APPLY TO?

Typically it will affect sub-contractors supplying their services to other contractors in the construction sector.

This applies if the services provided are:

  • standard rated or reduced rated, and
  • within the scope of CIS.

Supply and fit

Although the provisions apply principally to services in the construction sector, they cover all supplies of labour and materials in a single contract or transaction.  This is the case even where only the labour element must be reported under CIS.

WHO DOES THE REVERSE CHARGE NOT APPLY TO?

End users

The reverse charge is not intended to apply where a contractor works directly for an end user.  End users are consumers and 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, namely those who have an interest in the land where the work is being undertaken.  Where the end user is VAT and CIS registered, the reverse charge does not apply to supplies made to them where they notify the contractor in writing that they are an end user.

If you require any further information of assistance, please contact us.


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Tax relief on training costs explained

Is tax relief available for training costs when setting up a new trade in a limited company?

We have been asked this question a number of times recently.

Corporation Tax Relief is generally available for officer and employee training costs. Income Tax Relief and National Insurance Relief is also available to officers and employees who receive work-related training.

Where a limited company provides training to officers and/or employees a corporation tax deduction is available as long as the expenditure meets the basic requirement of being wholly and exclusively for the purpose of the trade. In most cases, the company will be providing training so employees can better perform their duties in the trade or to advance the companies trade and a deduction will be available.

Employees (including officers) are subject to income tax on any benefit received, however, exemptions for income tax and national insurance are available for ‘work-related’ training.

Where a company provides training costs to any officer or employee which is not work-related, for example, a company manufacturing widgets sending its Finance Director on a candle making course, the costs of the training is not work-related and is therefore taxable as a benefit in kind for the director. The benefit is reportable on the director’s p11d.

The cost of the candle making course is, however, a deductible expense for corporation tax purposes, as it is part of the Finance Director’s remuneration package, and their employment is wholly and exclusively for the purpose of the company trade.

This guidance does not apply to sole traders or partnership businesses.

If anyone has any questions regarding training costs please do get in touch.

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Pension Tax Relief Restricted for Higher Earners

As mentioned in the Conservative party manifesto, tax relief for pension contributions is to be restricted for those with income in excess of £150,000 a year. We were told that this is intended to fund the increase in the inheritance allowance for passing on the family home.

The current £40,000 pension annual allowance will be reduced by £1 for every £2 of income in excess of £150,000 down to a minimum of £10,000 at £210,000 of income. So, for example, where an individual has income of £170,000 in 2016/17, the £40,000 annual allowance would be reduced to £30,000.

Note also that, as already announced, the pension lifetime allowance is due to be reduced from £1.25 million to £1 million from 6 April 2016 with transitional protection for those with pension savings in excess of the new limit.

The Chancellor has also announced in the July Budget that there would be a further review of pension savings and pensions taxation.

Contact us if you need advice on pension planning and how the new pension rules will impact on you personally.


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Corporation Tax Rate to be Cut to 18%

The current UK corporation tax rate of 20% is the lowest rate in the G20, the 20 major trading nations. This rate continues to apply until 2017 when it has been announced that the rate will be reduced to 19% and then 18% in 2020. This appears to make trading via a limited company more attractive but note that there are significant changes to the taxation of dividends that take effect from 6 April 2016.


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Buy to Let Landlords – Interest Relief to be Restricted to Basic Rate

The Chancellor announced that the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the basic rate of tax. To give landlords time to adjust, the change will be phased in gradually over a 4 year period:

  • 2017/18 – the deduction will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction.
  • 2018/19 – 50% finance costs deduction and 50% given as a basic rate tax reduction
  • 2019/20 – 25% finance costs deduction and 75% given as a basic rate tax reduction

From 2020/21 – all financing costs incurred by a landlord will be given as a basic rate tax reduction.


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Annual Investment Allowance set Permanently at £200,000

The annual investment allowance (AIA) was due to be reduced from the current temporary level of £500,000 to just £25,000 from 1 January 2016. However the Chancellor has bowed to pressure from industry to stop tinkering with this allowance for expenditure on plant and machinery and set it at a permanent level so that businesses can plan their capital expenditure. He has decided on £200,000 for the new limit and businesses should consider bringing forward expenditure to before 1 January 2016 to benefit from the current higher allowance.


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Inheritance Tax and the Family Home

As mentioned last month the Chancellor has confirmed the introduction of an additional inheritance allowance that will be available in addition to the current £325,000 nil rate band which will, when fully phased in, allow a couple to pass on the family home tax free up to a value of £1,000,000.

The additional allowance, which will also be transferrable to the surviving spouse, will start at £100,000 for 2017/18. The allowance will then increase to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. Unfortunately the Chancellor also announced that the inheritance tax nil rate band will be frozen at £325,000 until 6 April 2021.

The main residence nil band is subject to a taper where the amount being left is more than £2,000,000 with £1 of the family home allowance being lost for every £2 of estate value over £2,000,000. This clawback is based on the value of the estate before reliefs such as business property relief and agricultural property relief and may result in some additional complications and redrafting of Wills.

If this change is likely to affect your family circumstances you may wish to arrange a meeting with us to consider the impact on your family’s inheritance tax position.


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Changes to Taxation of Dividends

The Chancellor has announced that from 6 April 2016 there will no longer be a notional tax credit associated with dividends received and the following rates will apply after a £5,000 tax free dividend allowance (which will be treated as a nil rate band):

  • Basic rate taxpayers – 7 ½%
  • Higher rate taxpayers – 32 ½%
  • Additional rate taxpayers – 38.1%

This will mean that from 2016/17 individuals will be able to receive up to £17,000 tax free:

  • Personal allowance £11,000
  • Tax free interest £1,000
  • Tax free dividends £5,000

A common strategy that we often advise to family company director/shareholders is that they extract profits from their company by way of dividends instead of paying themselves a salary. This is because there are no national insurance contributions on dividend payments and where the dividend income falls within the basic rate band (up to £42,385 for 2015/16) there is currently no income tax on dividends.

Where both husband and wife are directors and shareholders they will be able to pay themselves a salary of £11,000 each for 2016/17 and then dividends of £5,000 each tax free. However the next £27,000 of dividends up to the new £43,000 higher rate threshold would be taxed at 7 ½ % resulting in income tax of £2,025 each being payable for 2016/17. Under the current rules there would be no tax on such dividends up to £42,385.

This measure has been introduced to counter tax-motivated incorporation to level the playing field between trading via a company versus an unincorporated business. Note that dividends received in excess of the £43,000 higher rate threshold will be taxed at 32.5 % but without a notional credit thus increasing the effective rate from the current 25% to 32.5%.

In most cases it is still most tax efficient to draw dividends rather than an increased salary.


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Government U-Turn on Self-Employed NICs, for Now

During his first Budget on 8th March, new Chancellor Phillip Hammond announced to the world that he would  level the playing field between employees and the self-employed by increasing Class 4 National Insurance Contributions from 9% to 10% from April 2018 and then to 11% from April 2019. In justifying this change he explained that the self-employed are now entitled to more generous State Benefits than in the past, and thus the NIC rate should be increased towards the 12% Class 1 NIC rate paid by employee’s.

However, this was in fact contrary to the Conservative Party manifesto pledge not to raise income tax, national insurance contributions and VAT during the life of the Parliament and since the announcement the Government have bowed to political pressure and decided not to proceed with this proposal. However with the next general election set for 8th June we will wait with bated breath for a possible increase shortly after!

As previously announced, flat rate Class 2 NIC contributions, now £2.85 a week, cease on 5 April 2018.


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Digital Reporting to Start in April 2018, but Delayed for Smaller Businesses

Legislation to introduce Making Tax Digital (MTD) was planned to be included in the Finance Bill 2017, however Theresa May’s announcement of the general election for the 8th June has meant it is currently withdrawn until it can be properly debated. The Government is still very much committed to MTD which is still scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018.

Many business owners, professional advisor’s and the Treasury select committee had expressed concerns about the timescale for the introduction of MTD. The Chancellor therefore announced that there will be a one year deferral in the start date to 2019 for self-employed businesses and property landlords with gross income below the VAT registration limit. Another way of delaying the start of Making Tax Digital (MTD) would be to change the year end of your business. The proposed legislation currently specifies that MTD will apply to accounting periods commencing on or after 6 April 2018. This means that if you currently prepare accounts to 30 April then the first quarterly update to be submitted to HMRC will be for the period to 31 July 2018. However, if you changed the accounting date of your business to 31 March then the first quarterly update would be for the period from 1 April to 30 June 2019.

There will be no late filing penalties in the first year of the new system and the deadline for finalising taxable profit for a period will be the earlier of:

• 10 months after the last day of the period of account, or
• 31 January following the year of assessment in which the profits for that period of account are chargeable

Businesses and property landlords with a turnover up to £150,000 will be able to prepare accounts on a cash basis Digital quarterly reporting for companies and larger partnerships will not be introduced until April 2020. These changes will have a significant impact on how you keep your business accounts and communicate with HMRC and in most cases it is highly recommended that people take on a suitable accounting software package, such as Xero, to get over the hurdle.

Please contact us to discuss the impact of these changes on the way that you keep your accounts and the best possible solution’s to help.


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