Value Added Tax (VAT), a consumption tax levied on most goods and services in the UK, plays a significant role in the nation’s economy. Whether you’re a sole trader, limited company business owner or simply a curious consumer, understanding VAT is crucial for navigating the UK’s tax system effectively. Today’s comprehensive guide explains what it is, the various VAT rates, when you need to be registered for the tax, VAT schemes, and more. Read more
Changes in EU VAT is incoming from 1st July 2021 for Business to Customer (B2C) sales for those operating within the EU. The changes need to also be considered for businesses in the UK, post-Brexit, that wish to sell online directly to the customer.
The new EU VAT E-commerce package is comprised of two key components;
- One Stop Shop (OSS)
- Import One Stop Shop (IOSS)
It is not compulsory to report VAT using either of these methods, the option is still available to register for VAT in each EU country you wish to do trade with and account and pay VAT in each of those territories. However, reading that, you would wonder why you would take on such a task, when you can just do one VAT return, where the liabilities are then paid to each country where the B2C transaction occurred. However, importantly, these 2 methods can only be used for Read more
The Domestic Reverse Charge (DRC) for the construction sector comes into effect as of 01/03/2021.
What does this mean for you?
If you are VAT registered & you work falls under the Construction Industry Scheme (CIS) then from the 1st of March you will need a written declaration from your contractor that they are classified as an end user.
An end user simply put is the land owner or an intermediary company with a direct link to the land owner.
If they are classified as the end user then nothing changes and VAT will be paid to you to then declare on your VAT returns.
However, if you are not working for the end user, the VAT will not be paid to you and it will be your contractors responsibility to declare the VAT from your invoice to HMRC.
If you are on a flat rate scheme and some or all your work falls under the DRC then we advise you to consider writing to HMRC and cancelling your flat rate scheme for VAT. If the majority of your work is not for the end user, then most definitely do this immediately or call us and we can advise you.
If you need help understanding the DRC and how it applies to you then please do not hesitate to contact us on 020 8761 8000.
At Taxfile we specialise in the construction sector, calculating and submitting Making Tax Digital (MTD) compliant VAT returns for numerous sole traders and limited companies. If you are looking for an accountant to manage your MTD VAT returns, then we can help you.
“What are the main differences between being self-employed and running a limited company?”
“What are the advantages and disadvantages of having a private limited company?”
The major difference between running a private limited company and being self-employed are the administrative requirements you are required to do by law & although the volume is more, the data contained within those returns are pretty similar to being a sole trader.
A limited company will:
- need to keep company records
- report any changes to Companies House & HMRC
- need to file an annual company tax return along with the company’s accounts, giving an undistorted view of its finances.
So why go through the extra cost and resources of having a Limited Company?
In forming a limited company, you are limiting your personal liability. What this means is that the Limited Company becomes a legal entity of its own. Think of it as another being, that you work for. However, it is important to keep in mind that you cannot abuse your power with the limited liability, to take selfish and unnecessary risks. As a director, you are ethically and morally responsible for the business decisions and transactions the company makes.
As a director of a private limited company you will:
- make decisions that benefit the company rather than your own
- abide by the rules and regulations outlined by the company Articles of Association, which are written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary
- notify any shareholders if you might benefit personally from a company transaction
- always act with the intention of making the company successful.
Having a Limited company can also add professionalism to your business. This can help your business become even more successful because customers, clients, and B2B companies will be more inclined to trust you and buy your products or services if you are a limited company rather than a sole trader. It is quite common for B2B companies only to trade with another limited company as a general rule.
A final benefit is, if you have a profitable Limited Company, how you distribute salaries and dividends can have income tax savings, especially once your Read more
The domestic reverse-charge is a major change to the way VAT is collected by HMRC in the building and construction industry reporting under the Construction Industry Scheme (CIS).
It was being introduced to combat VAT fraud in the sector and the initial roll-out on 1st October 2019 was delayed due to a combination of the sector being ill-prepared for the change and Brexit. The date was moved forward 12-months to 1st October 2020 but due to COVID-19 the start date has been further advanced to 1st March 2021.
At Taxfile, we will start contacting our VAT clients working under the CIS, in preparation for the 1st March 2021 start date.
If you would like to know how to prepare your business for this, you will need to: Read more
Rishi Sunak, the UK Chancellor of the Exchequer has announced the self-employed and those who run a business as a partnership are to receive 80% of earnings, calculated from the mean average of their trading profits for the 3 previous tax returns (2016/17, 2017/18, & 2018/19). The trading profit is the taxable profit that is calculated as part of your income tax return, from either self-employment or as part of a partnership.
The scheme is called the Self-Employment Income Support Scheme (SEISS).
The average is determined by adding the trading profits for the three years, then dividing by three (if you’ve only been trading for two years, the government will add those two years and divide by two instead). This average can then be divided by 12 to calculate you monthly income average. 80% of this average will be what the government will offer you as a grant which is taxable (-meaning it will need to be declared in your 2020/21 tax return as income received).
The grant is capped at £2,500 p/m and last only for 3 months (although this may be extended depending on how the coronavirus pandemic plays out in the UK).
For you to be eligible, more than half of your income must come from your self-employment. In other words, you can’t claim if more than half your income come comes from another source, such as full-time employment.
Similarly, if more than 50% of your income comes from other sources usually included on your Self-Assessment tax return, such as investment or rental income, then you are not eligible.
Furthermore, you aren’t eligible for the grant if the 2018-19 trading profit is equal to or greater than £50,000, and the average profits for previous years starting in 2016-17 are equal to or greater than £50,000.
If you have not yet submitted your 2018/19 tax return (that was due 31/01/20), you will NOT be eligible for the grant. If you were self-employed during this period (06/04/2018-05/04/2019), then you have till the 23rd of April to submit your tax return and qualify for the SEISS. Contact us at Taxfile to help submit your 2018/19 tax return on 020 8761 8000.
Who isn’t eligible?
You are not eligible for the SEISS grant if any of the following applies:
- Your trading profits are equal to or more than £50,000 – for both tax year 2018/19 and when averaged across the tax years you traded in during last three full tax years starting in 2016/17.
- You aren’t self-employed or in a partnership at the moment, or don’t intend to be in the future. It’s not enough to merely be enrolled for Self Assessment and to have undertaken self-employment work or have a role in a partnership at some point in the past year. You must be trading now and intend to do so in the 2020/21 tax year too.
- You failed to submit a Self Assessment tax return for the 2018/19 tax year before 23 April 2020.
- You haven’t lost trading profits due to the coronavirus outbreak.
- Less than 50% of your income comes from your self-employment or partnership.
To apply for the SEISS, the government will contact you (via post) and invite you to apply online, using details they have via your self-assessment registration. It is estimated that the scheme will be available from June 2020, and that will be the earliest that the grant will be available to the self-employed.
Other coronavirus measures for self-employed workers
There are other coronavirus emergency measures that the government has put in place that might help you, as a self-employed individual or member of a partnership.
Deferred income tax payments
Self Assessment payments due on 31 July 2020 (that is, income tax payments on account) can be deferred until 31 January 2021.
Anybody who fills in a Self Assessment return and who is liable for payments on account can make use of this, not just the self-employed.
Time to Pay
If you’re self-employed and struggling to meet outstanding tax obligations due to financial difficulties, you can contact HMRC to see if you’re eligible for support via the existing HMRC Time to Pay Scheme. This allows more time to settle financial obligations if you can demonstrate a reasonable ability to pay in future. Contact HMRC on the special coronavirus helpline: 0800 0159 559.
Universal Credit increases
Because of the coronavirus outbreak, the government has increased Universal Credit amounts beyond the already anticipated yearly increase as of April 2020.
The standard allowance will be £409.89 per month.
Grants for businesses that pay little or no rates
If your business operates from a property and is registered for the Small Business Rate Relief (SBRR), or Rural Rate Relief (RRR), then it will receive an automatic grant of £10,000 from your local authority.
You don’t need to do anything to receive this (note: the requirements differ depending on where in the UK your business is located).
However, if your business doesn’t pay any rates, you may need to contact your local authority to ensure it has your bank details for the payment.
Coronavirus Business Interruption Loan Scheme
Businesses can apply for a loan with approved lenders. The government will underwrite 80% of the loan, making the loan more widely available to those who might not normally be able to apply.
It will also pay the interest for the first six months.
MOTs have been suspended
Those who use a vehicle for their self-employed work will be pleased to hear that MOTs have been suspended for six months, provided the MOT falls after 30 March 2020.
The vehicle must be kept in a road-worthy condition but the exemption is automatic, so there’s no need to apply for it.
If in your self-employment business you use a lorry, bus or trailer then there are different rules – MOTs are suspended for three months as of 21 March 2020.
This again is automatic, although you may need to apply under certain conditions.
Deferral of VAT Payments
If you are a VAT registered business in the UK and have a VAT payment to make between 20/03/20 & 30/06/20, this payment can be now deferred till 31/03/2021 without any penalties or charges imposed. If you pay via Direct debit, this needs to be cancelled with your bank for the deferment to occur. More information can be found at deferral of VAT payments due to coronavirus (COVID-19).
On 06/09/2019 HMRC announced that the Domestic Reverse Charge will be postponed for 12 months and will come into effect 01/10/2020. Their official statment;
“To help these businesses and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 12 months until 1 October 2020. This will also avoid the changes coinciding with Brexit.”
From 1st October 2019 HMRC will introduce the Domestic Reverse Charge for VAT returns within the construction industry if certain criteria are met.
HMRC states it is aware of the large scale fraud that has occured within the industry, whereby construction businesses charge VAT for their services but then disappear without paying their VAT bill, taking with them the 5% or 20% as additional profit. They have also managed to under cut their prices against many businesses working legitimately with the knowledge that they will have this additional ‘profit’. Therefore, by moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible.
Any company that is VAT registered and works under the Construction Industry Scheme (CIS) providing the following services may be subject to the Domestic Reverse Charge;
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
- pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
Services excluded from the Domestic Reverse Charge include;
- drilling for, or extracting, oil or natural gas
- extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
- signwriting and erecting, installing and repairing signboards and advertisements
- installing seating, blinds and shutters
- installing security systems, including burglar alarms, closed circuit television and public address systems
The final criteria is whether the service being provided is to the the ‘end-user’ or ‘intermediary supplier’. If it is then the normal way of charging VAT applies, if not, then the Domestic Reverse Charge applies. Please see the flowchart below to see if the Domestic Reverse Charge applies to you:
What is an ‘End User’?
For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
What is an ‘Intermediary Supplier’?
Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users.
To be connected or linked to an end user, intermediary suppliers must either:
- share a relevant interest in the same land where the construction works are taking place
- be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006
It will be your responsibility to ask your contractor whether they are the end user or intermediary.
If they are not, then you will not receive the VAT for the supplies being provided. This will effect your cash flow. Furthermore, if you are on a flat rate scheme, then the scheme will more than likely no longer be beneficial for you. If your sales are subject to the domestic reverse charge, then you would be considered as a regular repayment trader and could enrol on a monthly VAT return scheme to ease your cash flow by getting the VAT paid back to you on your expenses.
As the supplier, you will need to issue VAT invoices that clearly indicate the supplies are subject to the domestic reverse charge and that the customer is required to account for the VAT. The VAT due should be clearly stated however should not be included in the amount shown as total amount charged.
If the domestic reverse charge applies, invoices should clearly indicate the reverse charge applies using the correct terminology. HMRC suggests businesses use any of the following:
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: S55A VATA 94 applies
- Reverse charge: Customer to pay the VAT to HMRC
It should be clear on the invoice that the reverse charge mechanism has been applied.
You invoice should still show all the usual information required for a VAT invoice.
The legislation stipulates that if there is a reverse charge element in a supply then the whole supply will be subject to reverse charge if the parties agree. It will also cover the provision of construction services that includes materials.
There is no minimum threshold from which the reverse charge would apply.
Please contact us on 020 8761 8000 or email firstname.lastname@example.org if you would like to discuss how the domestic reverse charge will effect your business.
HMRC delays the rollout of Making Tax Digital (MTD) for businesses & individuals beyond 2021:
Even though MTD for VAT has been rolled out, the wider extension of the MTD scheme for individuals & businesses has been delayed till at least 2021.
The Chancellor’s 2019 Spring Statement mentioned;
“The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020.”
MTD for income & corporation tax was scheduled to come into effect from 2020, but as the UK prepares itself for Brexit, HMRC has redirected its focus on the implications of UK’s exit from the EU.
HMRC has said that its digital delivery team and business analysis team are being redeployed to focus on ensuring that a customs solution will be in place should it be required when the UK leaves the EU.
With the current perplexity surrounding Brexit, HMRC has stressed that ‘this does not indicate any expected outcome but is due to the level of work required to deliver any outcome’.
From 1st of April 2019 HMRC’s VAT Notice 700/22 will come into effect; Making Tax Digital (MTD) for Value Added Tax (VAT). The MTD initiative is believed to benefit HMRC on two levels.
It will help to ensure the correct VAT is being paid to HMRC, & seeing that VAT accounts for the highest unpaid tax in the UK (35%), the government has estimated that it will generate £610M in 2020-21 from eliminating erroneous returns.
The MTD initiative will also save HMRC money as it will no longer have the cost associated with maintaining the VAT portal where submissions are currently made, estimating a saving of £10M a year of taxpayers’ money.
HMRC’s long-term vision is to have one of the most digitally advanced tax administration systems in the world & they hope that by 2020 they will have MTD applied to all of UK’s taxation processes.
For this vision to be fulfilled it is believed that they will then strive to have all taxation data recorded in the Standard Audit File for Tax (SAF-T) format. Once this is achieved, HMRC will be able to undertake tax & VAT investigations frequently & randomly with very little cost, as it will free up resources from having to obtain & enter the data for analysis.
Being VAT registered means that your annual income equals or exceeds the current threshold value of £85,000.00. Currently, any business or individual registered for VAT, whether on a Flat Rate Scheme or on the Standard Rate, will from April 2019 need to prepare for the changes outlined by Notice 700/22.
When will it be applicable to me?
The 1st quarter of your VAT return that starts on, or after 1st April 2019.
Am I exempt from MTD?
Groups or individuals exempt from MTD include;
- those with religious beliefs that prevent them from using technology
- those going into insolvency
- those that it is reasonably impractical to do so (eg. geolocation, physical &/or mental disabilities – that prevent the use of technology)
What are my responsibilities?
You will need to ensure that all your transactions (expenses & sales) are individually recorded digitally with a MTD-compliant software. You still need physical &/or electronic copies of these records stored for at least 6 years. The MTD-compliant software is then used to calculate & submit your VAT returns.
What should my ‘digital’ data look like?
From April 2019 all digital record keeping will include;
- Business Name
- Business Address
- VAT Registration Number
- VAT Account Schemes
- Information about Supplies & Sales
All Supplies & Sales invoices should include;
- a Tax Point Date
- Sequential (alpha-)numerical labelling format
- Itemisation of services/goods
- NET amount clearly shown
- VAT rate & VAT amount clearly stated
Currently, the date, NET & VAT amount all need to be digitally stored for each-and-every-one of your transactions. It is also recommended that a digital upload of your bank feed is included to back the entries for both expenses & sales. VAT will then be calculated using these digital entries & submitted to HMRC via the compliant software used to record them.
View our latest MTDfVAT Newsletter HERE
[Updated]: It’s common knowledge that most of Taxfile’s South London staff are multi-lingual but can you guess which staff member speaks no less than four languages fluently (Russian, Pashto, Dari and English) and which staff member is into both metal music and Irish dancing? And who should you ask for if you need payroll services? And who specialises in bookkeeping … who in limited company accounts and so on? Our staff ‘mind map’ tells you a bit more about each member of the team, what their specialities are, key interests and, of course, their contact details in case you ever need their help. Take a look … Read more
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