Domestic Reverse Charge for VAT within the Construction Industry Scheme

IMPORTANT UPDATE!

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.”

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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 disaappear 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 businesess working legitametly with the knwoledge 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 follwoing 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 contactor 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 ali.asilzadeh@taxfile.co.uk if you would like to discuss how the domestic reverse charge will effect your business.

Making Tax Digital (MTD) delayed due to Brexit

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’.

Making Tax Digital for VAT

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

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George Osborne, the Chancellor of the Exchequer, announced his Autumn Statement on Wednesday (3 Dec 2014) in what could be seen as a mini budget. Here we focus on the key announcements, concentrating on those relating purely to taxation, as it is those which affect you, our customers, most directly.

1). First some good news: The UK is seeing the fastest growth out of all the G7 countries, and the number of people employed is at its highest point ever. This is good for all of us because it restores optimism in the UK economy, higher employment speaking for itself.

2). As we announced in a separate blog post, Stamp Duty (Land Tax) has been given a major shake-up and, for anyone buying a house for £935,000 or less, the amount of Stamp Duty which they’ll have to pay will be less, and sometimes very significant. See our separate blog post and infographic for more detail.

3). In the financial year 2015-16, the tax-free personal allowance (which is the amount you can earn before you start to pay any tax) will increase to 10,600 which is an increase of £600. So … more tax-free money in your pocket, which is good.

4). Economy flights will become cheaper for under 12s from 1 May 2015 and under 16s from 1 March 2016, because their tickets will become exempt from tax on those dates. So … a small concession, but another welcome one. Average 4-person families will save £26 for flights within Europe and £142 on flights to the U.S.

5). From 3 December 2014, spouses will be able to inherit their partner’s ISA benefits should their partner pass away. Currently this is not the case and the change will mean that, from 6 April 2015, the surviving spouse or civil partner will be able to Read more

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Don’t have online banking? No problem! We also have a new system where we can scan in your paper statements straight into our ‘Bankstream’ accounting platform, making analysis faster and easier.

Either way, ask us for further information or, better still, send us a sample download of a typical month’s bank data (or Read more

The Shocking Truth about Tax on the Poor

How much is taken in taxHave you ever wondered how much of one’s total income is taken up in tax? And I don’t mean just Income Tax. I mean in ALL taxes paid by ordinary taxpayers throughout the course of a year. Such a figure would need to take into account National Insurance (income tax in all but name, some might say), the insidious Value Added Tax or ‘VAT’ – which on its own is a hefty 20% tax on what is often already taxed money for most ordinary taxpayers, and don’t forget to include Council Tax and finally, of course, Income Tax itself.

Well, the answer may surprise you. Before seeing the answer, though, try The Guardian’s little quiz about this and see how you get on. There are only 8 questions, and for each you simply choose from 4 possible answers – so it’s quick to complete and, once submitted, you are immediately taken to a feedback page where you will be told how your answers compared to the average respondent and, more interestingly, what the correct answers were. It’s interesting to note that, in a joint poll by The Equality Trust and Ipsos MORI, nearly 70% of people drastically underestimated how much the poorest pay in tax, as a percentage of their total income. They also over estimated how much the richest pay as a proportion of total income. This wide misconception is due to most people incorrectly focusing only on Income Tax alone which, in reality, only makes up a small proportion of total taxes paid throughout the course of a typical year.

Spoiler alert: be warned that I’m shortly going to divulge the answers Read more

HMRC now has landlords in their sights

Residential property lettingsHMRC (Her Majesty’s Revenue & Customs) has announced some new initiatives over the course of the last month and one of these is The Let Property campaign which is a campaign designed to recover undeclared tax from those receiving income from residential property lets. The idea is to encourage those landlords with under-declared income or gains (potentially including income tax, Capital Gains Tax and VAT) to contact them in order to make a full disclosure. By doing so they may well avoid the higher penalties which may be applied to them should HMRC discover the undeclared income/gains via other means. Don’t forget that they now have access to information shared across systems, including in relation to properties both at home and abroad, as well as being gained through their digital intelligence system ‘Connect’ which identifies links between individuals, entities and properties. So the message to landlords is loud and clear!

The campaign applies to landlords whether they have just a single property or a large portfolio of properties and encompasses lets to students, business workforces and the holiday market. Read more

New brochure available for download

Taxfile's BrochureHave you ever wondered what other services the Taxfile group can help you with? Well, find all the answers in the new downloadable brochure, which outlines services undertaken at the various different offices in both South London and Exeter, Devon. From accountancy and bookkeeping for SMBs to simple tax returns for individuals and right through to the most complex of complicated tax issues – we’re here to help and the new brochure gives you all the contact details for each office including address, email, telephone, Skype ID, how to book appointments on-line and, finally, what discounts are available – both to new and existing customers – it’s all there … or rather I should say … it’s all here! (A4 PDF format, less than 1MB).

Vat Flat Rate Scheme

The VAT flat rate scheme was introduced on 24th April 2002 and was designed to assist small businesses through calculating VAT payments as a percentage of their turnover.
This scheme was developed to reduce the cost of complying with VAT obligations and the time spent by removing the need to calculate and record output and input tax in calculating the net VAT.
The scheme is optional and available to businesses with a VAT exclusive annual taxable turnover of up to £150,000(£225,000 after 1 April 2009) and total turnover including the value of exempt supply and other non- taxable income does not exceed £187,500(not required after 1 April 2009).
The flat rate percentage depends on the trade sector of the business you are running and it can range from 2% to 13.5%.
To see the category of the business you are falling into and what percentage you need to use follow this link from hmrc. As you could probably notice, the flat rate percentages have been changed since the decrease of normal VAT rate from 17.5% to 15%.
Under this scheme, businesses charge their customers the normal rate for the supply of goods and services.
Although businesses do not need to calculate the VAT on each and every transaction they make, they still need to keep a record of their flat rate calculation showing their turnover, the percentage used and the tax calculation.
As far as capital assets are concerned,for those costing more than £2000 (including VAT), the VAT can be recovered in the normal way as long as they meet certain conditions.
There are a few special categories of businesses like farmers, barristers and florists where special VAT flat rate rules apply. About all this we can explain more in due course.
Taxfile‘s tax accountants in South London and Exeter will first assess your eligibility for the flat rate scheme then will weight up pros and cons and see how beneficial it is for you.
Then finally they will register you within the scheme and offer ongoing support.