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The domestic reverse charge for VAT comes into effect for the construction industry on 1 October 2019, as we explained in our newsletter on 13 June 2019.

However, many smaller building firms are unaware of this huge change to VAT administration. The Federation of Master Builders (FMB) has found that 69% of their members haven’t heard of the VAT reverse charge, and of those who were aware of it, only a third had started any preparation.

Here are four steps to work through.

1. Check whether the reverse charge affects some or all of your sales.

The reverse charge applies to the full value of the invoice, not just the labour element as CIS does. Most building services are covered by the reverse charge except for professional services of architects and surveyors. Check the list in the HMRC guidance.

Only VAT registered firms are affected by the reverse charge. Some builders whose turnover is under £85,000 register for VAT so they can reclaim VAT on purchases. This decision needs to be reviewed urgently.

2. Perform a cash flow analysis to see how the reverse charge will affect you.

From 1 October 2019 subcontractors will no longer charge VAT on their invoices to contractor firms, but they will need to reclaim VAT on purchases. This is likely to make their VAT returns repayment cases, which may impact their cash flow. The business may need to apply for a temporary loan to cover the period until the VAT is repaid. Alternatively, you could change to making monthly VAT returns, if you can cope with the extra deadlines.

3. Review the accounting system and make sure software updates will cope with the reverse charge.

Not all software suppliers have got to grips with the domestic reverse charge as they have been concentrating on MTD. All software updates need to be tested before October.

Firms which use the flat rate scheme will almost certainly have to leave that scheme before 1 October, as it will not be beneficial to pay VAT to HMRC on invoices where VAT has not been charged.

4. Train your own staff in how the reverse charge will operate and how to ensure the correct information is input into accounting software.

Staff need to be confident that they understand when the reverse charge applies, and when it doesn’t. To apply the reverse charge (ie not charge VAT on their invoice) they need to check that their customer is VAT registered and the VAT number is valid. This information can be collected for regular customers before October.  Please contact this office if you need any help in this regard.

Written by the Tax Advice Network

The first quarterly VAT returns required to be submitted under MTD are for the period to 30 June 2019 (stagger 1), and the filing deadline is 7 August. However, as this is the first MTD return for businesses who have not taken part in the MTD pilot there are two alternative deadlines to be aware of.

Monday 29 July 2019 is the last day that business can sign-up to MTD, if they pay their VAT by direct debit. Most businesses do pay their VAT by direct debit, which ensures they never miss a payment deadline if there are sufficient funds in their bank account.

It takes the bank seven working days to move the direct debit authorisation from the old banking system used by HMRC to the new MTD banking system, hence the deadline for signing-up for MTD leaves seven clear working days before the filing deadline.

Where a business pays its VAT by electronic transfer, and not by direct debit, the last day to sign-up to MTD is Tuesday 4 August. This because HMRC can take up to 72 hours to confirm that the business has been registered for MTD. You should not attempt to submit a VAT return under MTD until that confirmation email has been received from HMRC.

Written by the Tax Advice Network

Tax obligations do not cease on death, the executors of the deceased’s estate have to complete the final tax return to the date of death, and deal with the IHT returns and payment.

Where the estate is extensive or there are competing claims under the Will it can take a significant period to transfer all the assets to the beneficiaries. In such cases the estate may generate taxable income during the period of administration. This leads to the dilemma of whether to register the estate for self-assessment in order to pay that tax.

HMRC doesn’t want lots of deceased estates registering for self-assessment, as in most cases there is very little tax to pay, and there will be no on-going liability once the estate is distributed. HMRC has recently clarified its guidance on when an estate must register for SA, and the rules can be summarised as follows:

• Where the only income is interest and the tax due is less than £100 – don’t report this to HMRC at all.
• If the tax due is more than £100 but less than £10,000 for a year, write to HMRC who will reply with a payslip with which to pay the tax (see informal payment arrangements).
• Where the probate value of the estate is more than £2.5m and the total tax due exceeds £10,000, or the assets sold in one year exceed £500,000, the estate should register with HMRC for SA.

If the estate does need to register for SA this should be done by 5 October after the end of the tax year in which the estate starts to receive income or has chargeable gains on which tax is payable.

Written by the Tax Advice Network

HMRC is concerned that some individuals use tax avoidance schemes through their companies, such as contractor loan schemes. When the scheme fails, leaving the company with a significant tax debt, the company becomes insolvent and the tax is never paid to HMRC.

This draft provision will make the company’s directors, and others connected to the company, jointly and severally liable for the tax debts owing by the company when it is subject to an insolvency procedure.

However, all of the following conditions must also apply:

• the tax liability is expected to arise from tax avoidance, tax evasion, repeated insolvency, or is a penalty for facilitating tax avoidance or evasion;
• the company began insolvency proceedings so that some or all of the tax liability would not be paid to HMRC; and
• the individual was responsible for the company’s abusive actions, or he or she received a benefit from the result of those actions.

This is a very wide-ranging measure which is aimed at tax avoidance (undefined) as well as tax evasion (illegal actions). Tax avoidance could include the incorrect application of the IR35 rules, ie ignoring the requirement to pay tax on a deemed salary.

Instead of the tax debt dying with the company, this law would allow it to be transferred to; directors, shadow directors, and participators in the company who are shareholders but not directors. There will be a right of appeal against these measures.

The law will take effect for tax periods ending on or after the date the Finance Bill 2020 is passed, and for tax penalties determined and issued after that date.

Written by the Tax Advice Network

Clients who are planning to sell or transfer a residential property which has been their main residence, are at risk of losing some CGT reliefs if the transaction is delayed beyond 5 April 2020. Remember it is the date that unconditional contracts for sale are agreed which fixes the sale date for CGT, not the completion date of the transaction.

Let property
Lettings relief currently applies to the gain accrued for periods of letting, if the property has at some point been the owner’s main residence. It is often claimed by landlords who let out their former home instead of selling it when they move up the property ladder.

From 6 April 2020 very few sellers will qualify for lettings relief, as the relief will only apply for periods when the property owner was in occupation alongside the tenant. Periods when the property was fully let to tenants won’t qualify. This will retrospectively wipe out any accrued lettings relief for properties which are currently fully let.

This is a significant blow to “accidental” landlords as lettings relief can be worth up to £40,000 per owner per property.

Delay of sale
Many difficult family circumstances such as; divorce, serious illness or relocation of a job can mean the owner has to move out of their home long before it is sold. A downturn in the market could also mean properties take longer to sell. Clients in these circumstances need to be aware that the final period of CGT exemption will be cut from 18 months to 9 months for sales agreed on and after 6 April 2020.

Transfer between spouses
A transfer of a property between spouses or civil partners is always done on a no gain/ no loss basis, and that will not change. However, for transfers made on and after 6 April 2020 the transferee spouse will inherit the exemptions derived from the use to which the property was put during the period it was owned by the transferor spouse.

This could reduce the main residence relief where a let property is transferred to a spouse and it then becomes the couple’s main home.

Written by the Tax Advice Network

The CGT relief available when a loan to a trader becomes irrecoverable (TCGA 1992, s 253) only applies if the borrower is located in the UK. This was ruled as being an unjust restriction to the free movement of capital guaranteed by article 63 of TFEU.

In January 2019 the European Commission issued a reasoned opinion asking the UK to change the law on this point. The Finance Bill 2020 will amend the existing law to allow loans provided on and after 24 January 2019 to qualify for the loans to trader CGT relief wherever the borrower is located. Loans made before 24 January 2019 will only qualify for this relief if the borrower is in the UK.

Share loss relief can transform a capital loss into an income tax loss (ITA 2007, s 131). The loss must arise when shares, which were subscribed for in an unquoted company, become worthless. If the shares were not issued under the EIS or SEIS, the company must meet additional conditions such as trading wholly or mainly in the UK. That geographical restriction was ruled as being an unjust restriction to the free movement of capital guaranteed by article 63 of TFEU.

The European Commission asked the UK to change the law on this point. For share disposals occurring on and after 24 January 2019, share loss relief can apply irrespective of where the business of the company is carried on.

Written by the Tax Advice Network