VAT Domestic Reverse Charge – 12 month deferral

HMRC has delayed implementing the domestic reverse charge for construction services for a further 12 months. The changes to legislation were designed to combat fraud within the construction sector and were intended to become live from 1 October 2019.

After taking representations from industry bodies, HMRC have given construction businesses more time, amid concerns that many are still not aware of the proposed rule changes and the potential clash with Brexit related issues to contend with over the upcoming months.

In conversations with our clients since the announcement on Friday 6th September 2019  it is clear that the deferral is welcome. However, as this is only a delay, we urge businesses to understand the cash flow implications of this rule change, together with considering how they may need to adapt accounting systems and communicate with relevant stakeholders in good time before 1 October 2020.

If you have any queries regarding this matter then please get in touch with Joe Sullivan

Proposed changes to the payable R&D SME tax credit

A company which claims R&D relief as a SME can surrender its R&D losses in exchange for an R&D tax credit, at 14.5% of the surrendered loss.  This can be a real advantage to start-ups and innovative small businesses as the credit can be a real boost to their cash flow position.

In the November 2018 budget, the government announced the introduction of a new anti-abuse cap to the SME payable tax credit scheme.  From 1 April 2020 the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NIC liability for that year. 

This cap has been designed, in HMRC’s words, ‘to deter abuse from fraudulent companies and those where the UK activities amount to little more than claiming the payable tax credit’; however there is concern that this cap could have a negative effect on genuine companies undertaking Research and Development.   In particular it will affect companies who for genuine reasons use subcontractors and externally provided workers (e.g. agency staff) to assist them with their R&D projects.

Following this announcement, a consultation document was issued in March 2019 inviting comments on how the proposed cap will be applied, to minimise any impact on genuine businesses, before it is legislated in the next Finance Bill.  This consultation closed at the end of May and we are awaiting HMRC’s publication of the outcomes of the public feedback to see how they expect the cap to work in practice.

If you have are concerns that your R&D claim could be affected by the proposed cap, please contact Jenny Trunks

Disposals of UK land – changes to the capital gains tax compliance regime for non-UK resident individuals

What’s new from 6 April 2019

The non-residents capital gains tax (NRCGT) rules have been extended to include non-residential property. The rules now apply to direct and indirect disposals of interests in all UK land (i.e. both residential and commercial).

A direct disposal is a disposal of land, whereas an indirect disposal is a disposal of shares in a company (whether the company is UK resident or not) and at least 75% of the value of the shares is derived from UK land. This briefing note covers the rules surrounding direct disposals for individuals and further advice should be sought for disposals by non-UK resident companies.

Background

The NRCGT rules were introduced on 6 April 2015 and apply to disposals of residential properties from this date. Only the gain arising after 5 April 2015 is chargeable and there are different ways of calculating the gain depending upon the individual’s circumstances.

The new rules now extend NRCGT to cover gains on commercial property, but only to the extent that the asset has increased in value since 5 April 2019.

Compliance

All persons making a NRCGT disposal have 30 days following the conveyance of the property (not the date of exchange) to submit an on line NRCGT Return to HMRC. A return must be filed even if there is no tax payable or the property is sold at a loss.

Late filing and payment penalties may be charged if the 30 day deadline is missed.

The Return must include a calculation of the chargeable gain or allowable loss and the tax due must be paid within 30 days of conveyance (i.e. the same deadline as the filing of the Return).

The rate of tax depends on whether the property is residential or non-residential and the level of the individual’s other income for the year.

The compliance regime has also been revised from 6 April 2019 to require all non-residents to make a payment on account of the CGT due on the disposal, irrespective of whether or not the individual is within the Self-Assessment regime. 

Potential problem areas

Due to the short filing and payment deadline not all of the relevant information may be known within that timeframe. It may be necessary to include reasonable estimates in the computations and then amend the Return when the actual details are available. In addition, it may not be possible to correctly calculate the amount of tax payable because the rate of CGT depends on an individual’s UK taxable income for the whole tax year and this may not be known at the time of submitting the return.

How we can help

We would be happy to calculate the capital gains tax position on the sale of the UK property and advise upon which method of calculation is most beneficial for your client. We can also file the NRCGT Return with HMRC.

Should you wish to discuss this in further detail please contact a member of our Professional Practice Team on 01772 821021.

Cars that avoid the 4% Diesel Surcharge Tax

In a world of new acronyms and ever shifting government re-categorisation of CO2 and NOx bands, there has never been a more important time to make sure the model, and more importantly specification of the company car gives the optimal tax outcome.

In 2018/19 the government increased the diesel surcharge, branded ‘Diesel Tax’ as a move to tackle air pollution, which is now set to rise to 4%. This is also in conjunction with the Worldwide Harmonised Light Vehicle Test (WLTP). The WLTP is based on real-driving data, designed to better match on-road performance. This also introduced the on the road Real Driving Emissions (RDE) test, to provide much more ‘real-world’ figures compared to the normal lab tests and to push for stricter Nitrogen Oxide (NOx) emission targets, which has meant the CO2 emissions of new vehicles have risen for the second year in a row.

The 4% diesel surcharge applies to all models that don’t meet something called Real Driving Emissions 2 (RDE2). Starting from January 2020 all vehicles will have to beat the RDE stage 1 (RDE1) NOx target, with the stricter stage 2 (RDE2) target due in January 2021. This will require all manufacturers to retest their model ranges, potentially leading to further impacts .The RDE1 is for the new Euro 6 diesel engines, known as 6.2 and have a NOx limit of 168mg/km, with the RED2 engines, known as 6.3 a NOx figure of 120mg/km or less.

There have been a large number of vehicles from prestige marques now boasting RDE2 compliant engines already, but buying a vehicle on a 3 year lease would mean it would be caught by the law in 2021, so be careful on any imminent diesel purchases, as an RDE2 compliant vehicle now will save the surcharge in the future.

If you would like to discuss this blog in more detail please email Paul Locker or call us on 01772 821 021.

New multi-million pound residential development unveiled in Morecambe

A new iconic building featuring 50 luxury apartments has been revealed on Morecambe Promenade.

Built by local development company, M H Stainton Homes, the two-year Broadway project is due to officially open in August.

The multi-million pound scheme features a range of apartments on the site of the former Broadway Hotel at the corner of Broadway and Marine Drive East, Morecambe.

Offering contemporary, open plan living, the new development includes a selection of one, two and three-bedroom apartments with prices from £190,000, to Penthouse Apartments from £450,000+. The eight-storey building, with underground car park, features a striking glass façade with views across Morecambe Bay and the surrounding areas.

The project incorporates a number of innovative features designed to provide healthy and environmentally-friendly homes. A bespoke ventilation system provides a continuous supply of fresh filtered air to help reduce allergies and asthma symptoms, while energy-efficient materials have been used throughout to endorse the company’s forward-thinking approach.

The developer has been advised on the project by North West accountancy and advisory firm MHA Moore and Smalley, which provided advice on accounting and tax planning.

Michael Stainton, managing director of M H Stainton Homes, said: “The changing face of Morecambe is a fascinating story, and ambitious plans such as Eden Project North are set to be a major factor in the area’s regeneration.

“Morecambe is a prime example of how seaside resorts are changing. It’s an exciting time for the area. I was born and brought up in Morecambe and I’m proud to be investing in its future.

“The financial advice and support provided by MHA Moore and Smalley has guided us through the various hurdles we’ve navigated during this development. We’ve worked with the firm on numerous projects and the professional experience of the team is invaluable.”

Victoria Dadswell, director at MHA Moore and Smalley, added: “I’ve worked with Michael on a range of development projects, but this the most iconic. It’s a huge achievement and has created a stunning focal point for the Morecambe seafront. I’m looking forward to working with the team on their next adventure.”

Established in 1999, M H Stainton Homes is an award-winning developer based in Lancaster. The firm build a range of properties in prime locations across the North West of England. Further information regarding M H Stainton Homes can be found on their website.

Advisory Fuel Rates

HM Revenue & Customs (HMRC) have published the latest revised Advisory Fuel Rates (AFRs) which came into force on 1 June 2019. The new rates are as follows:

Engine size Petrol – amount per mile LPG – amount per mile Diesel – amount per mile
1400cc or less 12 pence 8 pence 10 pence
1401cc to 2000cc 15 pence 9 pence 12 pence
Over 2000cc 22 pence 14 pence 14 pence

The fuel rates are calculated based on the current fuel price and adjusted miles per gallon figures, and only apply when either:

  • An employee is reimbursed for business mileage undertaken in a company car or,
  • Employees are required to reimburse their employer for the cost of fuel used for non-business purposes in a company car.

They should not be used in any other circumstances or in relation to vans.

Hybrid cars are treated as either petrol or diesel cars for the purpose of the fuel rates.

If a rate per mile is paid no higher than the advisory fuel rate, HMRC will accept there is no taxable income and no Class 1A National Insurance is therefore payable.

Fuel rates which better reflect your circumstances may be used if:

  • the cars being used are more fuel efficient or,
  • if the cost of business travel is higher than the guideline rates.

Full details should be kept on how the fuel rate has been calculated and the basis used to avoid any dispute with HMRC.

Business Travel in a Company Car

If the fuel rates paid to employees are higher than the advisory fuel rates and it cannot be demonstrated that the fuel costs per mile is higher, there will be no fuel benefit in kind if the mileage payments are solely for business travel. However, any excess paid will be treated as earnings liable for class 1 National Insurance for the employee. If rates paid are below the advisory fuel rates, the employee can claim back the difference from HMRC at the end of the tax year.

Private travel

HMRC will accept there is no fuel benefit in kind if a record has been kept which details all the private mileage completed by an employee and the correct rates have been used to calculate the cost of fuel used by the employee for private travel. This amount must then be reimbursed to the employer.

HMRC review the fuel rates quarterly in March, June, September and December, so new rates are likely to be introduced on 1 September 2019.

VAT and Residential Property

Following on from our previous construction and real estate video, today we are focusing in on VAT in residential property development.

Clients should be considering:

– How to go about incurring little VAT in the construction phase

– Minimising working capital

– Getting cash flow projections correct

– What classes as zero rated and where will VAT be charged

Watch what experts Jonathan Main and Joe Sullivan have to say…

SMEs and International Tax

Expanding a business overseas can be a new and exciting chapter for a business but in order to transact successfully overseas, the business must understand the various tax considerations to ensure they don’t miss out on profits and don’t fall foul of foreign tax regulations.

One of the main issues arising from overseas business transactions is Withholding Tax.

Withholding Tax (WHT)

WHT is a tax deducted at source by the customer in the overseas company. The local tax regulations of the country will determine the percentage deducted. SMEs must understand the implications of this and factor in ways to mitigate this tax otherwise it can become an absolute cost to the company.

First thing is to consider the rate that could be applied, the overseas country may have a double tax treaty with the UK and this means that the rates of WHT can be reduced to the treaty rate which is generally lower than the countries standard rates or in some cases reduces the WHT percentage to 0%. If a company is charged in excess of these rates, an application can be made to recover the difference. The success of an application will depend on the relevant countries’ procedures and deadlines.

The other way of mitigating the tax is by double tax relief. Double tax relief works by offsetting the tax withheld against the UK tax charge. This can mean in some instances the whole of the WHT can be offset and the UK liability is reduced to nil conversely however if there is a small amount of CT chargeable or the WHT tax rate is in excess of the UK CT rate (currently 19%) then the difference is again going to be a cost to the company.

What’s the answer?

It is important to create a dialogue with the customer at the beginning to understand what they are planning to deduct. Often problems can arise if there are disagreements as to the nature of the service, and therefore which rate to apply.

It may be that a gross up clause is included in a sale agreement which would effectively negate the WHT, This could create problems however if a customer does not wish to accept the increased values.

Further Advice

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please call us on 01772 821021 to be put in contact with a member of our Tax team.

Zero Rated – is a building an annexe used for a relevant charitable purpose?

A First-Tier Tribunal was held on 29 November 2018 between HMRC and Oholei Yosef Yitzchok Lubavitch Schools (“OYY Schools”) to determine if construction was zero rated or standard rated for VAT purposes.

Background

OYY runs a nursery and a school. The nursery had never made a profit and seeks donations from the community to cover any shortfalls. The parents of the children are charged a ‘contribution fee’ to cover running costs. However, no child is turned away due to lack of payment as the focus is on religious matters.

In 2013, it was decided to move OYY Schools to a newly acquired site. The existing residential building was to remain and have some internal works completed. The existing extension to the rear of the property was to be demolished and a new single-story area be constructed in the same location (the new structure).

The new structure is physically attached to the existing building by sharing a wall and consists of a large rectangular space that can be partitioned by a sliding/folding screen (like a school hall/gymnasium). There is no internal access between the existing building and the new structure. There is also an office which is used for charitable purposes.

The school would use the existing building and the nursery would use the new structure. Both the nursery and the school can operate independently of each other.

The existing structure and new structure each have their own entrance. The existing buildings entrance is at the front of the property and the new structures entrance is at the rear of the property.

Findings

For the new structure to be classed as zero rated, it is required to be an annexe that is intended to be used for a ‘relevant charitable purpose’ and is not in the course or furtherance of business. To determine this, the Tribunal addressed the following main requirements:

  • Is the new structure an extension or an annexe?

Simply because the new structure is physically attached to the existing structure does not mean that it is an extension rather than an annexe. The existence of an internal access to the new structure is a material factor in determining whether the work is an extension rather than an annexe.

The new structure is not sufficiently integrated to be considered an extension to the existing building and it is an annexe.

  • Can the new annexe function independently from the existing building?

The annexe has its own toilets, kitchen, storage and office spaces. It is connected to water and electricity and has its own separate boiler.

There is no access to the annexe internally. Each building has its own main access. Even though the existing building and annexe are on the same parcel of land, it does not alter the fact that the annexe can function independently from the existing building.

  • Was the intended charitable use of the annexe in the course or furtherance of a business?

Just because the provider has a charitable status does not automatically mean its operations cannot be classed as a business. The school and nursery are run on a non-profit basis. OYY Schools needs to finance its activities and does this through amounts paid by parents of children attending the school and nursery and through donations and grants. The Tribunal found these fees are set at a level designed to ensure OYY Schools covers its costs. Then donations are used to subsidise the fees. The Tribunal found the fees set would not allow the nursery to break even and if there were no other sources of income, the nursery would operate at a loss. The ability of the nursery to exist and to carry out its charitable purposes depended on receipt of donations and grants from other sources. The Tribunal found that the annexe was not used in the course or furtherance of a business.

Decision

The Tribunal ruled that the appeal by OYY Schools was allowed, and the construction of the annexe was zero rated for VAT purposes.

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please call 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.

HMRC has published further guidance on the VAT domestic reverse charge applying from 1 October 2019 to supplies of building and construction services.

The reverse charge affects businesses who supply specified services that also need to be reported under the construction industry scheme (CIS).

The new guidance has more detail and examples to help suppliers check whether their customers are end users or intermediaries. The reverse charge does not apply to customers who are end users, or if they are ‘intermediary suppliers’. The concept of intermediary suppliers means that if a number of connected businesses collaborate to purchase construction services, they are all treated as if they are end users and the reverse charge will not apply to their purchases. For this purpose, intermediary suppliers are VAT and CIS registered businesses connected or linked to end users, who:

  • share a relevant interest in the same land where the construction works are taking place;

and

  • belong to the same corporate group or undertaking.

The guidance suggests a practical way of dealing with the question of end-user status would be for businesses to include a statement in their terms and conditions to say they will assume their customer is an end user, unless they say they are not.

HMRC acknowledges that some businesses who have large numbers of active contracts with sub-contractors at a variety of sites may have difficulty establishing whether the reverse charge applies or not in the run-up to 1 October 2019. The guidance therefore states that where contractors can see that the reverse charge applies to more than 5% (by volume or value) of all contracts with one sub-contractor, they may apply the reverse charge to all contracts with that sub-contractor.

Transitional arrangements mean that normal VAT rules apply to invoices for supplies entered into customers’ accounting systems before 1 October 2019 and if payment is made on or before 31 December 2019. The reverse charge will apply in all cases where invoices are entered into systems on or after 1 October 2019, or payment is made on or after 1 January 2020.

The guidance covers situations in which businesses may become repayment traders as a result of the reverse charge removing the need to pay VAT on some of their sales.  It also details how best to move over to monthly returns should this be the case.

Examples are provided of how the reverse charge will apply to supplies of construction services made to certain sectors, such as utility companies and local authorities or other public bodies, including planning gain agreements.

Employment businesses who supply staff, and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge.

The guidance can be found here and a presentation done by our partners Johnathan Main and Joe Sullivan can be found here.

Further Advice

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please on 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.