Monthly Archives: October 2018

“Paving the way to a brighter future” – PM+M partner Jane Parry reviews Autumn Budget announcement

Today’s Budget was described by the Chancellor as one that ‘paved the way to a brighter future’ and that austerity is finally coming to an end. However, as we are still to secure a Brexit deal with our EU partners, I believe that it can only really be described as ‘steady as you go’ until that is actually sorted. We will also have to wait to see if his claim of a post-Brexit ‘double dividend’ comes to fruition. Let’s hope it does.

From a North West point of view things are looking generally good. According to the NatWest North West PMI, IHS 2018 Report, the region is enjoying the strongest growth in the UK along with Wales; new business rose at the fastest pace; whilst the rate of job creation accelerated to make the North West the leading UK region.

Business Rates

The news that for the next two years up to the next business rates revaluation, for all businesses with a rateable value of £51,000 or less, the government will cut their rate bills by one third. Whilst £900m worth of immediate relief is coming on stream and town planning laws are being relaxed. Many small high street businesses have been calling for this kind of action for a long time and it couldn’t have come soon enough – especially as there will also be a new fund to improve infrastructure and transport, to re-develop empty shops as homes and offices, and restore and re-use old and historic properties.

Roads

I was also pleased to see that Britain’s roads will get a £420m immediate injection in a bid to improve our network including to help local authorities fix pot holes. Although small projects in themselves, these kinds of essential repairs will make a significant difference to communities and businesses and will ultimately drive efficiency and productivity.

Broadband Infrastructure

Much of the North West is rural and the lack of superfast broadband has been a real problem for both businesses and individuals. The announcement that £250m is being pledged to install superfast broadband in some of the country’s most remote areas is again a positive step. If rural businesses are to compete then they need to have full fibre connectivity. I just hope it will be rolled out quickly and efficiently.

Business Investment Stimulus Measures

The news that the Annual Investment Allowance will rise from £200,000 to £1m is welcome and should stimulate business investment – especially in such an innovative region such as ours. Also, a new allowance for investment in new commercial property is a positive step.

Digital Services Tax

The introduction of a digital tax on global companies with at least £500m in global revenue was a surprise to some. He claims it will come into force in April 2020 and will raise £400m per year. There’s no doubt he’s right that progress on this has been ‘painfully slow’ but it’s step in the right direction as start ups should not shoulder the burden. However, what is really needed is a global agreement. That should be the aim.

Apprenticeships

I think the cutting of the apprentice fee for small businesses – qualifying companies will have to contribute 50% less – will be well received. We know of many firms in the North West which have been deterred from taking on apprentices due to the cost. Anything to combat that reticence must be applauded.

Tax

The Chancellor has announced a tax cut for 32 million people with the increasing of the personal tax allowance to £12,500 and the higher rate to £50,000. These were the allowance targets for 2020 but are being bought forward to 2019.

The tightening of the rules on the abuse of self-employment status will mean more workers becoming subject to PAYE from 2020.  For some of them that is probably reasonable, for others the wielding of a rather blunt tool by HMRC may result in more costs and confusion.

Finally, Making Tax Digital for VAT continues its inexorable march towards introduction on 1 April for the vast majority of VAT registered businesses.  Whilst modernisation and enhanced efficiency in the tax system is a goal nobody can disagree with, the Government have still seemingly not understood the very real upheaval and cost that this will bring for many, particularly small, businesses.

Conclusion

All in all, this Budget produced no surprises or shocks. Some of the announcements could well be good for business but without a Brexit deal I’m sceptical about what will actually happen. Time, as they say, will tell.

VAT: changes on the horizon for the construction industry with huge potential impact on cashflow

Significant VAT changes for the construction industry are due to come into force on 1 October 2019.

New legislation is designed to combat what HMRC describe as “missing trader fraud”, whereby the suppliers charge and collect VAT, but do not pay it over to HMRC.

In essence, the legislation will require the recipient rather than the supplier to account for the VAT due on certain construction services.

The new regime requires careful planning from all construction businesses in order to avoid a cashflow crisis.

How will the new rules work?

Under the new rules, businesses supplying construction services must not charge VAT where their customer:

  • is registered for VAT; and
  • will use the services to make an onward supply of construction services.

Instead of the supplier charging VAT, the recipient must self-account for VAT on the services received. This is known as ‘reverse charge’ accounting.

With each business transaction, the VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’. Only client-facing organisations at the top of the construction supply chain will be required to pay the tax.

Who will be affected?

As a general rule of thumb, any company that is registered with the Construction Industry Scheme (CIS) – HMRC’s construction-specific tax-collecting regime will fall into the reverse charge category.

The new rules will apply to construction services supplied from 1 October 2019, regardless of value, even if construction is not the main business activity.

The definition of ‘construction services’ is extensive and duplicates the definitions used for the Construction Industry Scheme (CIS). It also includes goods, such as building materials, but only when supplied as a single package within the construction service being provided (e.g. a builder providing bricks).

Exclusions

There are some exclusions, such as the installation of seating, blinds, shutters and security systems. Also excluded are professional services of architects, surveyors and consultants. However, where excluded services are supplied as a package with other services which fall within the new criteria, the whole package will be subject to the reverse charge.

There are further exclusions for construction services which are to be used by the recipient to make an onward supply to a connected party or to make a supply between a landlord and tenant.

Clearly if the construction services qualify to be treated as zero rated then the reverse charge will not apply. For example, a sub-contractor supplying construction services to a main contractor who is building a new residential property would currently charge VAT at 0%. This treatment is unaffected by these new reverse charge rules and the sub-contractor would continue to charge VAT at 0%

In addition, the reverse charge rules will not apply where the recipient of the construction service is not VAT registered. In these circumstances, VAT must be charged in the normal way. However, the non-VAT registered recipient must add the value of construction services received to the value of its sales, when deciding whether it has exceeded the VAT registration threshold (currently £85,000). This is likely to mean that many small contractors who are not currently VAT registered will need to be registered in the future.

HMRC to be strict from 1 October 2019

As an anti-fraud measure, it is expected that HMRC will enforce the new rules strictly:

  • If a supplier charges VAT in error, HMRC may not allow the recipient to reclaim it
  • If a supplier applies the reverse charge rules in a situation where it should have charged VAT, HMRC will most likely seek to collect the under declared VAT from the supplier

In both situations, penalties and interest could apply. The main message we are delivering is that businesses within the construction sector need to have a sound understanding of the new rules and have systems in place ahead of the deadline to ensure that VAT is accounted for correctly.

Many subcontractors will find they are in a regular VAT refund position in the future. They will have VAT to claim on materials and overheads but will not charge VAT on sales where the reverse charge rules apply.

Some businesses will suffer a cashflow disadvantage, where VAT collected from customers is currently used as working capital before being paid over to HMRC.

To correctly apply the new rules, the supplier needs to know what its customer intends to do with the services and will need to be able to evidence this to HMRC. HMRC are undertaking a detailed technical consultation on this issue.

How should you prepare?

Final legislation and HMRC guidance is due to be issued in October of this year, giving businesses 12 months to prepare. Affected businesses should ensure they are fully up to date with the changes and when the VAT should be charged and, likewise when a reverse charge is required.

Well in advance of October 2019 construction businesses need to conduct a full review of supplies made to and received from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2019.

It is of course right that the problem of missing trader fraud within the construction industry be tackled, but if traders have not picked up on the forthcoming changes they may be faced with unwanted penalties and interest as a consequence of failing to implement the reverse charge correctly. We would recommend that in the event of doubt, seek guidance from your professional adviser to ensure there are no such unwelcome surprises.

If you would like to discuss how the above changes could impact on your business, please contact our property tax specialist, Jonathan Cunningham, on 01254 604318 or via email at jonathan.cunningham@pmm.co.uk.