Budget 2021: VAT Extension for Tourism & Hospitality Businesses

On 3 March 2021, the Chancellor announced the annual UK Budget for the coming year in an effort to kick start the economy following the restrictions imposed as a result of the Coronavirus pandemic. Amongst the package of financial support and assistance during 2021/22, the Chancellor confirmed further assistance for the tourism and hospitality sector which has arguably been the worst affected industry by the pandemic.

Temporary VAT rate extended

The UK government has confirmed that the temporary reduced rate of 5% VAT for the tourism and hospitality sector will be extended to until 30 September 2021.  To help businesses manage the transition back to the standard 20% rate, the Government has also announced that a 12.5% rate will apply for the subsequent six months from 1 October 2021 until 31 March 2022.  The 20% normal standard VAT rate will then be reinstated from 1 April 2022.

Summary of changes

The table below summarises the applicable VAT rate and timeline for the sectors:

Period VAT Rate
To 30 September 2021 5%
From 1 October 2021 to 31 March 2022 12.5%
From 1 April 2022 20%

To highlight the significance of this announcement, this will be the first time since 1979 that 4 distinctive VAT rates will be in operation in the UK.

Key Issues

With this extension of the reduced VAT rate we consider the following key issues:

  • How to operate and correctly identify the tax point in relation to supplies to determine the correct VAT rate to use.
  • If your business also provides goods or services that fall outside the scope of the reduced VAT rate above such as alcohol sales, how should this be accounted for and are you paying the correct amount of VAT?
  • If you are using an accounting packages (Xero, Quickbooks, SageL50 etc.) you may not have a defined tax rate for the interim 12.5% that will be used from 1 October 2021 to 31 March 2022.  A new tax rate may therefore need to be added to your software package.

Tax Points

Special provisions are available which provide an option to maximise the use of the limited 5% reduced rate period – allowing you to choose to apply the ‘basic’ or ‘actual’ tax point.  But with this flexibility it can cause complexities.  Actual tax points (invoicing for a service or receiving payment) normally override the basic tax point (service completion) but the special provisions allow a choice; tax payers have the opportunity to receive cash payments and account for VAT at the reduced rate for supplies that will be taking place after end of the 5% period (so after 30 September 2021).

Practical Example

Consider a scenario where a hotel business supplies hotel rooms at £100 per night, 50% of the payment is usually paid for at booking and 50% at the time of the stay.  A customer books on 1 March 2021 to stay at the hotel on 5 October 2021.  The issue created here is that up to 30 September 2021 the VAT rate will be 5%, but from 1 October 2021 the VAT rate will change to the interim rate of 12.5%.  Therefore at the time of the booking the VAT rate is 5% but at the point of stay it will be 12.5%.

The table below outlines the different VAT rates in the outlined scenarios:

Scenario Tax Point VAT Treatment
Customer pays 50% at time of booking (1 March 2021) and then 50% at time of stay (5 October 2021)

Payment date of 1 March 2021 will create a tax point, therefore VAT at 5%.

Second payment/actual stay will create another tax point, therefore at 12.5%

1st Payment: £50 (VAT 5% of £2.38)

2nd Payment: £50 + (VAT 12.5% of £5.55)

Total VAT = £7.93

What if full amount was paid at time of booking (March 2021) Date of payment – 1 March 2021, therefore 5% rate Payment: £100 (VAT 5% of £4.76)
What if full amount was paid at time of visit (October 2021) Date of payment  – October 2021 Date of payment  – October 2021
Payment: £100 (VAT 12.5% of £11.11)

Unusually, and perhaps due to the nature of the legislation, there are no specific anti-forestalling measures (designed to stop people circumventing and abusing the rate change), in particular when the VAT rate increased to 12.5% from 1 October 2021 and then returns to 20% from 1 April 2022.

If you would like to discuss the impact of the reduced VAT rate on your business please contact our VAT team on 0131 558 5800 or email VAT@chiene.co.uk.

Extension to Annual Investment Allowance announced

The UK Government has announced that planned reduction to the amount of relief available under the Annual Investment Allowance (AIA) will be delayed.  The AIA is a tax incentive for businesses to promote investment. Generally, it can be claimed against most types of plant and machinery (but not cars), including fixtures and fittings. The relief enables businesses to claim a 100% tax deduction for eligible expenditure.

The current amount of relief, set at £1,000,000, is a temporary measure which was scheduled to revert back to £200,000 from 1 January 2021. This has now been delayed until 1 January 2022, to encourage investment following the COVID pandemic.  Businesses can therefore continue to claim up to £1 million in immediate tax relief for capital investments (such as for plant and machinery).

This extension will be welcome to businesses that are looking to invest in plant and equipment.

Further delay in implementation of Construction Services Domestic Reverse Charge

HMRC has issued a short brief, which outlines that the introduction of the domestic reverse charge for construction services will be delayed a further 5 months until 1 March 2021, due to the impact of the Coronavirus pandemic on the construction sector.

The domestic reverse charge for building and construction services was originally planned to come into force on 1 October 2019, but this was initially delayed for a year in response to industry concerns that some businesses were not ready to implement the changes required.

This further extension has been implemented to help businesses overcome the effects that the Coronavirus pandemic has had and provide additional time to prepare for the introduction of the reverse charge

HMRC have also confirmed that there will also be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.  This is designed to make sure both parties are clear whether the supply is excluded from the reverse charge.  It reflects recommended advice published in HMRC guidance and brings certainty for sub-contractors as to the correct treatment for their supplies.  If followed, it will remove a concern that HMRC may seek to challenge the reverse charge treatment where a business that qualified as an end user or intermediary supplier had not given any notification of their status.

In the intervening period, HMRC will continue to focus additional resource on identifying and tackling existing perpetrators of the fraud.  It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.

If you have a query about the domestic reverse charge, please contact our VAT team today at vat@chiene.co.uk.

COVID-19 Extension to option to tax deadline for land and buildings

HMRC has announced temporary changes to the time limit and rules for notifying an option to tax (OTT) land and buildings during the COVID-19 outbreak.

Under the normal time limits, there is a requirement to notify HMRC of a decision to opt to tax land and buildings within 30 days by either:

a) Printing and sending HMRC the OTT notification, signed by an authorised person within the business; or

b) Emailing a scanned copy of the signed notification.

Due to social distancing in response to the coronavirus outbreak, HMRC have noted that it may be challenging to follow the above rules. HMRC have therefore temporarily changed the rules to help businesses, and agents during this challenging time, which we have outlined below.

1. Changes to the time limit

HMRC has temporarily extended the time limit to notify HMRC to 90 days from the date the decision to opt was made.  This applies to decisions made between 15 February and 31 May 2020. All notifications can be sent to optiontotaxnationalunit@hmrc.gov.uk.

2. If you are notifying an option as a business

The OTT notification can be submitted to HMRC with an electronic signature, but HMRC need evidence that the signature is from a person authorised to make the option on behalf of the business. Examples of supplementary evidence include emailing the notification:

  • With an email from the authorised signatory to the sender within the business, giving authority to use the electronic signature;
  • From the authorised signatory with their sign off in the email and the form; or
  • With an email chain, or a scan of correspondence showing the authority given by an authorised signatory.

3. If you are notifying an option as an agent

In cases where an agent is notifying HMRC of a client’s decision to opt, the notification can be emailed with an electronic signature, however you also need to send HMRC proof that:

  • The signature is from a person authorised to make the option on behalf of the business; and
  • Authority has been granted to you by the business to use the electronic signature.

Examples include emailing the notification:

  • With a current email, or email chain from an authorised signatory of the client’s business, giving you authority to use this signature and send it to HMRC on their behalf;
  • With a scan of the correspondence showing authority is granted by an authorised signatory to use their electronic signature on the form, and to also send this form to HMRC on their behalf.

Consideration should be given to the points outlined above to ensure that any OTT notifications sent to HMRC are processed in a timely manner.

If you have any queries in relation to this, please do not hesitate to contact our VAT Director, Iain Masterton (iain.masterton@chiene.co.uk).

Residential Property – 30 Day Capital Gains Tax Returns

New rules requiring taxpayers to submit Capital Gains Tax (CGT) returns to report the sale of residential properties came into force on 6 April 2020.  These rules require taxpayers selling such properties to file a CGT Tax Return with HMRC and pay the tax due within 30 days of completion.  This will particularly affect those selling buy-to-lets, other rental accommodation and second homes.

No CGT return is required where no CGT is payable on the sale – for example where the gain is covered by losses realised in the past or a relief applies in full (in particular main residence relief, which applies to exempt the gain that arises in periods that a property is your main home.)

It may also still be necessary to include the gain on any self-assessment tax return prepared for the year.  This will be essential where circumstances mean that that the 30 day CGT payment made was too high or too low, which can often be the case, not least as the rate of CGT may be uncertain at the time the CGT return is prepared  – this can be 18% or 28% depending on income levels for the tax year.

Please let us know if you have sold or are planning to sell any residential property – we will be happy to provide advice and deal with the relevant tax returns required.  HMRC are able to apply significant penalties for late or incorrect returns and so it is vital to ensure that this is dealt with correctly. Contact us today at mail@chiene.co.uk or call 0131 558 5800.

Scottish Residential Property – Main Tax Issues to Consider for Overseas Buyers

Scotland remains an attractive place for the overseas buyer to purchase a residential property. For many, they will be looking for a property as an investment. However, other overseas buyers could be looking for a second home or a base to do business.

The demand for residential properties to rent in Scotland remains strong with most landlords continuing to enjoy good occupancy rates and capital appreciation in recent years. At the same time, an increasing number of tourists are staying in properties made available for short term letting by local residents. Edinburgh has a strong Airbnb sector and is now second only to London in terms of average revenue per room let.

However, there are tax traps waiting for the overseas buyer due to a number of recent changes to property taxes. Tax will need to be considered at the time of a purchase or sale of residential property in Scotland, and when income is received from the letting of the property.

An overseas buyer should consider:

  • Land and Buildings Transaction Tax (LBTT) on the purchase of a property.
  • Income Tax when they receive income from the letting of a property.
  • Capital Gains Tax (CGT) on the sale of a property.

The rates of LBTT and CGT have increased in recent years. In addition, the method of assessing the profits liable to income tax has also changed.

Purchasing a Residential Property in Scotland

An overseas buyer purchasing a Scottish property will need to pay LBTT. Those purchasing property in the rest of the UK pay either Stamp Duty Land Tax (in England and Northern Ireland) or Land Transaction Tax (in Wales). No LBTT is payable on purchases of up to £145,000. The rates of LBTT are then as follows:

  • Above £145,000 to £250,000 – rate of 2%
  • Above £250,000 to £325,000 – rate of 5%
  • Above £325,000 to £750,000 – rate of 10%
  • Over £750,000 – rate of 12%

LBTT is charged with reference to the chargeable consideration that falls within the relevant band. So, for a property with a purchase price of say £300,000, the first £145,000 is charged at 0%, the next £105,000 at 2% and the remaining £50,000 at 5%. The total LBTT payable would be £4,600. There was a temporary reduction in the rates of LBTT for purchases between 15 July 2020 and 31 March 2021.

In cases where a residential property is already owned (either in the UK or overseas) there is an additional LBTT charge. The ‘Additional Dwelling Supplement’ (ADS) is payable at a rate of 4% on the total consideration; so, the ADS payable on a purchase price of £300,000 would be £12,000. Therefore, the total amount of LBTT payable on the purchase of a second home in Scotland worth £300,000 would be £16,600.

An overseas buyer who is considering purchasing a number of properties in Scotland would be strongly advised to obtain tax advice before proceeding. One of the issues to consider would be whether to make the purchase in the individual’s own name, or if this should be made through a company or a partnership.

If the purchase is made through a company or partnership, there will be a different method of calculating LBTT. In the case of high value properties (over £500,000), there may also be ATED (‘Annual Tax on Enveloped Dwellings’) charges to consider. Income received from the letting of a property held within a company will be liable to UK corporation tax at a flat rate of 19%. Any gain realised on the disposal of a residential property would also be liable to corporation tax (rather than CGT).

Letting a Residential Property in Scotland

An overseas buyer who receives income from the letting of a Scottish residential property may have income tax to pay on the rents received. The assessable income will simply be the difference between gross rents and allowable expenditure. Allowable expenditure will include letting agent fees, property repairs, property insurance, etc.

The assessable income is then taxed at the UK rates of income tax. Nationals of European Economic Area countries (including UK nationals living overseas) are entitled to the UK personal allowance. This means that for the 2020/21 tax year they will have no income tax to pay provided their assessable income is less than £12,500. For 2020/21, the first £37,500 of assessable income in excess of the personal allowance is then taxed at a rate of 20%, with the balance at 40% / 45%.

Individuals who are Scottish taxpayers pay the ‘Scottish Rate of Income Tax’ (SRIT) on assessable rental income. In general, the SRIT is one percentage point higher than in the rest of the UK. A Scottish taxpayer is an individual who is UK resident and who belongs to Scotland, i.e. they spend most of the UK tax year in Scotland.

It could be that income tax is payable on the same source of rental income in both the UK and overseas. Where this is the case, it is likely that credit will be received for income tax paid in the UK against tax due on the same source of income overseas. However, the terms of the relevant double tax treaty would need to be consulted.

An overseas buyer may decide to make their property available for either long term lets or short term lets. There are differences in the tax rules that apply to long term lets and to short term lets that qualify as a ‘Furnished Holiday Letting’ (FHL). A FHL is a property that is made available as a holiday let for at least 210 days during the tax year and is actually let for 105 of those days.

The one major difference between the calculation of profits when a property is let on a long-term basis and when a property is a FHL concerns interest payments made on loans taken out to purchase the residential property. Until 5 April 2017, interest payments made on all loans taken out to purchase a residential property were allowed in full as a revenue expense. However, since 6 April 2017 relief is no longer available in full on long term residential lets and from 2020 / 21 is restricted to the basic rate of tax.

The restriction in the tax relief due on interest payments may have a significant impact on the profits after tax of some landlords. For many landlords, the most straightforward option may be to transfer property ownership to a lower earning spouse. Other landlords may decide to sell one or more properties and reduce borrowings or, for certain properties, transferring to a FHL may be appropriate. Transferring a residential property business into a company may be advantageous from an income tax point of view but it may be difficult to avoid a charge to CGT and / or LBTT.

Overseas landlords will need to register with HM Revenue & Customs and submit self-assessment tax returns covering the period from 6 April to 5 April each year, with a submission deadline of 31 January following the tax year. Tax is also due on 31 January following the end of the tax year.

Non-resident landlords (NRL) are also subject to the provisions of the Non-Resident Landlords Scheme (NRLS). The NRLS requires tax to be withheld on the rent received by either the tenant or the letting agent, as appropriate. However, it is possible to receive rent without a deduction of tax, if tax matters are fully kept up to date. Where the NRLS does not apply, either the tenant or the letting agent must make quarterly returns to HMRC within 30 days of the end of the quarter. The tax must also be paid over to HMRC by the same deadline.

If the property is not going to be let and the intention is for it to be owner occupied, the overseas buyer will need to pay council tax. The rate of council tax due is set locally and is an annual charge that is usually paid on a monthly basis. The rate of council tax due is determined by the value of the property.

Selling a Residential Property in Scotland

When an overseas individual sells a residential property in Scotland, they may have CGT to pay if the property has been sold for a gain. CGT is only payable where the gains in a particular tax year are more than the annual exemption (£12,300 for 2018/19). CGT is then payable at a rate of 18% on the first £37,500 of gains. Any additional gains will be taxed at a rate of 28%.

The gain is calculated as the difference between gross sales proceeds (less costs of sale such as legal and marketing costs) and the amount paid for the property (including costs of purchase such as legal fees and SDLT/LBTT). Any costs incurred on capital improvements to the property (such as building an extension) will also be allowable.

Relief from CGT may be available where a property has been an individual’s main residence at some point during the period of ownership.

Until 6 April 2015, a gain realised on the disposal of a UK residential property by an overseas individual who was not resident in the UK was not chargeable to UK CGT. However, special rules were introduced from 6 April 2015 and these apply to all non-resident individuals who dispose of a UK residential property. If a disposal is within the ‘Non-Resident Capital Gains Tax’ (NRCGT) rules, a NRCGT Return must be filed within 30 days of conveyance.

Under the NRCGT rules, it is only the gain attributable to the period from 6 April 2015 to the date of sale that is liable to NRCGT. The gain may be calculated using the ‘default method’ which requires a property valuation at 5 April 2015. This value then becomes the base cost that is used in the CGT calculation. Alternatively, the gain on sale is calculated as normal and a day count used to determine the gain attributable to the period from 6 April 2015 to the date of sale.

Position on Death

Should the overseas buyer die while holding a Scottish residential property, Inheritance Tax (IHT) may be due. A Scottish residential property would be considered a UK situs asset for IHT purposes. IHT is charged at a rate of 40% on the total UK assets of a deceased individual when these exceed the IHT nil rate band, which is currently £325,000.  IHT is also due on gifts made in the seven years before death. The overseas buyer would be advised to have a Scottish Will in place.

There are various ways in which the exposure to IHT could be mitigated. Ownership in joint names with a spouse would avoid a charge to IHT on the first death, with any charge being deferred until the second death. Alternatively, ownership in joint names with adult children would provide multiple IHT nil rate bands.

The overseas buyer may not be intending to hold the property for the long term. Should the property be sold, and the sales proceeds returned overseas, no charge to IHT would arise.  However, taking out life assurance to cover the risk of an IHT charge arising on an unexpected death may be prudent.

Overseas individuals who had previously been advised to purchase a UK residential property through a corporate structure in order to avoid UK IHT should be aware that the rules recently changed. With effect from 6 April 2017 they will have an exposure to IHT with reference to the value of the residential property.

If you are an overseas investor and have a query about the UK tax implications of purchasing or selling a residential property, please contact Richard Clarke at property@chiene.co.uk or call 0131 558 5800.

 

A guide to the Construction Industry Scheme

Companies and individuals that operate in the construction industry must be compliant with the requirements of HMRC’s Construction Industry Scheme (CIS). In this detailed guide, Neill McKillop runs through the parameters of the CIS and outlines the definitions used by HMRC to enforce the rules.

What is CIS?

CIS was introduced to reduce tax fraud by subcontractors not declaring income on their tax returns. It obligates contractors to deduct money from a subcontractor’s payments and pass it to HMRC. CIS applies to construction work to a permanent/temporary building or structure and includes most construction activities, but also has various exceptions (see table below):

CIS Applies CIS Exceptions
Preparing a site e.g. foundations and access works Architecture and surveying
Demolition and dismantling Scaffolding hire (without labour)
Building work Carpet fitting
Alterations, repairs and decorating Making materials used in construction
Installing systems for heating, lighting, power, water and ventilation Delivering materials
Cleaning inside of buildings after construction work Work on site that is clearly not construction e.g. running a canteen or site facilities

 

Commonly Used Definitions

Contractors, subcontractors and the self-employed

A contractor is a business that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many others. Other businesses can be included as a contractor if their annual average expenditure (over a period of 3 years) on construction operations is +£1m.

Private householders are not counted as contractors so are not covered by the scheme.

The contractor must decide on the individual’s employment status when the subcontractor is first engaged. The fact that the subcontractor has worked in a self-employed capacity before is irrelevant in deciding on their employment status – it’s the terms of the engagement that matter. For a contract to be used within the scheme, it must not be ‘a contract of employment’. This means that the scheme applies to workers who are self-employed under the terms of the contract, and who are not employees subject to Pay As You Earn (PAYE).

Registration and verification of Contractors

All contractors must register with HMRC for CIS. Subcontractors can choose whether to register or not, and this will affect the level of deductions that are taken from their payments.

Before a contractor makes a payment to a subcontractor, they must contact HMRC to check the payment status of the subcontractor, to ensure the correct deduction is made. This process is usually only required for new subcontractors in the last 3 tax years.

The process will establish the level of deduction to be made in accordance with the subcontractor’s payment status:

  • 0% Gross payment
  • 20% Net of standard deduction payment
  • 30% Net of higher deduction, usually if the subcontractor is not registered with HMRC, or cannot provide accurate details

The verification process is completed online, and it is important that details provided are accurate to ensure correct deductions are made.

Monthly returns and deductions

Each month, contractors must send HMRC a complete return of all the payments they have made within the scheme. The return will include:

  • Details of the subcontractors
  • Details of the payments made, and any deductions withheld
  • A declaration that the employment status of all subcontractors has been considered
  • Declaration that all subcontractors that need to be verified have been verified

Where no payments have been made to a subcontractor in a tax month it is advisable (though not mandatory) to make a nil return to avoid HMRC issuing penalties for failure to make a return. All contractors are obliged to complete returns monthly, even if they are entitled to pay their PAYE quarterly.

Once the payment status has been established it is not always necessary to deduct tax on the whole payment made to the subcontractor. The following items should be deducted from the gross payment when calculating what deduction should be made:

  • VAT
  • The cost to the subcontractor for materials (including VAT if not registered for VAT)
  • Fuel (but not for travelling)
  • Plant hire used in construction operations
  • Cost of manufacture of materials used in construction operations.

Payment of deductions must be made to HMRC either by the 19th or 22nd (if paid electronically) of the following tax month they relate to.

Types of subcontractors – Individuals or limited companies

Subject to certain qualifying conditions, subcontractors who are individuals can apply to be paid gross (with no deductions from their payments). Subcontractors who make a return of their profits each year and their respective tax liability will be driven by this return. Where a subcontractor has already suffered deductions from their payments given to them by contractors, and the amount deducted is greater than the amount due, HMRC will repay the excess. If there is a shortfall, the subcontractor must make a balancing payment.

Subcontractors that are limited companies should offset deductions on their receipts against the following sums payable to HRMC:

  • PAYE tax due from employees
  • Employer and employee NIC
  • Student Loan repayments from employees
  • CIS deductions made from subcontractors

The company will need to reduce the sums payable on the above by the amount of CIS deductions made from the company’s own income. This should be done monthly (or quarterly, as appropriate) and the calculation should be shown on the company’s Employer Payment Summary (EPS).

If for any period the company’s own CIS deductions are greater than the sums payable above, the company should offset the excess against future payments in the same tax year. At the end of the tax year, once HMRC has received the Full Payment Submission (FPS) and final EPS, any excess CIS deductions will either be refunded or set against Corporation Tax due.

Penalties

The penalty system under CIS can be severe and directly impact operations should a business fall foul. There are a variety of penalties which cover an incorrect monthly return that is filed negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declaration in respect of employment status. Late monthly returns also generate penalties as follows:

  • £100 fixed penalty (if one day late)
  • £200 fixed penalty (if 2 months late)
  •  Tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 6 months late)
  • Second tax-geared penalty, which is the greater of £300 or 5% of any deductions shown in the return (if 12 months late). Where HMRC believe information is deliberately withheld, the penalty will be higher.

If a contractor fails to produce records relating to payments made under the scheme when asked to do so, HMRC may charge up to £3,000.

Please note contractors are no longer charged penalties in respect of any months for which a return is not due, however HMRC should be notified in this situation.

Future changes to be aware of – VAT Reverse charge

The UK Government recently postponed a new measure designed to reduce VAT fraud in the construction industry.  The ‘reverse charge’ will now be introduced from 1 October 2020 and will have an impact on businesses in the construction industry.

From this date it will be necessary for subcontractors to ensure their invoices provide for ‘domestic reverse charges’. This will make it clear that the VAT responsibility is with the contractor and that the subcontractor will not take any cash.

Iain Masterton – Director of VAT at Chiene + Tait previously published an article on the VAT Reverse Charge that can be found here – https://www.chiene.co.uk/vat-reverse-charge-construction/

How we can help

Chiene + Tait helps businesses comply with the arduous requirements of the Scheme. If you have any issues or queries surrounding CIS or are looking for a supplier to administrate the scheme on your behalf, please do not hesitate to get in touch with our team.

 

Construction Services Domestic Reverse Charge

Update September 2019: the Construction Services Domestic Reverse Charge has been postponed until 2020.

HMRC has now issued new guidance in relation to the VAT reverse charge for building and construction services which will be introduced from 1 October 2019.  This new guidance supplements and expands upon the guidance note published in November 2019.  The legislation change is now contained in SI 2019/892.

This guidance can be viewed here: www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.

It comes into effect on 1 October 2019 and means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier.

It will only apply to individuals or businesses in the construction trade who are registered for VAT in the UK (although it will not apply to consumers).

This will affect you if you supply specified services that are reported under the Construction Industry Scheme (CIS).  You’ll need to prepare for this change by:

  • checking whether the reverse charge affects either your sales, purchases or both
  • contacting your regular clients or suppliers to let them know
  • making sure your accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on your cashflow

Will the domestic reverse charge apply to your supply?

If you consider your business might be affected by this change and you would like to discuss this further please do not hesitate to contact our VAT Director Iain Masterton at vat@chiene.co.uk or call 0131 558 5800.

Construction Firms Missing Out on R&D Tax Relief

Construction firms are missing out on millions in available tax incentives. A recent HMRC study showed that there has been a lower-than-expected take up of Research & Development Tax Relief (R&D) in the sector.

R&D tax relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds that help cash-tight companies to keep the lights on and pay suppliers. £100k of qualifying expenditure under the SME scheme can get you either:

  • £230k worth of enhanced losses (worth £44k @ 19% tax rate); or
  • A £33.35k tax credit (cash in hand)

The construction sector is innovative by nature. Modern methods of construction & Building Information Modelling (BIM) have led to the development of new ecological and sustainable technologies that are used day-to-day in the sector. There was surprise therefore when the study showed that construction accounted for less than 3% of all R&D claims submitted.

The lower-than expected figures can likely be explained by a lack of awareness of the R&D Tax Relief in the sector, along with concern that the work undertaken does not qualify. There is also a misconception that R&D tax relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case.

Where Companies are adapting equipment, creating new processes or developing better, safer or greener methods of construction, they will almost certainly be undertaking R&D.

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate.

Annual Tax on Enveloped Dwellings (ATED) Deadline Approaching

Are you aware of the upcoming 30 April 2018 Annual Tax on Enveloped Dwellings (ATED) deadline? If you are affected, you will need to calculate any ATED payable based on property valuations as at 1 April 2017.

If you think that this could apply to you, please download our Comment On here. Please do not hesitate to contact Adele Horner (adele.horner@chiene.co.uk) or call us on 0131 558 5800, if you require any further assistance or information about ATED.

Non-Resident Capital Gains Tax Returns

With effect from 6 April 2015, the UK capital gains tax (CGT) regime was extended to bring into charge non-residents disposing of UK residential property. Before this date, CGT did not apply to non-residents, other than those carrying on a trade in the UK, and since 6 April 2013, companies subject to the annual tax on enveloped dwellings (ATED) charge.

The charge applies to non-resident individuals who hold property directly or through a partnership, non-UK resident trusts and certain companies.

Where a property was acquired before 6 April 2015, it is only the gain accruing from that date which is charged to tax. The charge is normally the excess over market value at 5 April 2015 although it is possible to elect for an alternative method.

HMRC must be notified of any chargeable disposal within 30 days of the conveyance of the property (not the date of the exchange). The disposal is notified by means of an online form, found on HMRC’s website, and failure to notify HMRC within the required timeframe will attract a fixed penalty of £100 and the potential for further penalties, including daily penalties and tax geared penalties.

Payment of any CGT calculated is due at the same time as filing the CGT return unless the individual is already in the self-assessment regime, in which case CGT is payable by 31 January following the tax year in which the disposal is made (although note that a CGT return is still required within 30 days of completion).

Certain high-value residential properties owned by companies may already be subject to UK tax under the ATED regime. The threshold property value for ATED purposes is currently £500,000. Should a disposal fall within both the ATED and non-resident CGT regimes, the former takes precedence (although a non-resident CGT return will still be required).

It is important that non-residents are aware of their UK tax filing requirements when disposing of UK residential property. Differences of opinion have arisen between the accounting and legal professions as to who should be notifying an individual of their responsibility to notify HMRC within 30 days of completion. Ultimately, however, the responsibility rests with the individual to ensure that returns are submitted, and associated tax paid, on time.

If you have a query about non-resident CGT, contact our specialist Property Group today at property@chiene.co.uk.

Tax Changes to Buy To Let Property Rules for Landlords

Recent changes to the taxation of buy to let properties will have a substantial impact on landlords.

Land and Buildings Transaction Tax (LBTT)

From 1 April 2016, the Additional Dwelling Supplement imposes an additional 3% ‘slab tax’ on the acquisition of residential property which is not the purchaser’s main residence.

Restriction to Income Tax Relief for Interest Paid

Restrictions to income tax relief for financing costs for residential property apply from 6 April 2017. Under the new rules, rental profits and taxable income will be determined without taking account of interest payments.

The new rules are to be phased in and will apply to 25% of the interest in 2017/18, 50% in 2018/19 and 75% in 2019/20 with 100% of the interest being subject to the new rules from 6 April 2020.

The changes to the tax relief will not just result in a higher rate taxpayer paying additional tax equal to 20% of the interest paid (or 25% if an additional rate taxpayer). The changes may also lead to:

  • Tax being paid on rental income when there is a loss, after deducting interest.
  • The landlord moving from the basic rate to the higher rate of tax.
  • Tax on child benefit if taxable income exceeds £50,000.
  • Loss of personal allowance where taxable income exceeds £100,000.

Incorporation

The restriction to tax relief does not apply to companies. For some landlords moving the properties to a company of which the landlord is a director and shareholder may result in substantial tax savings. The transfer may be done legitimately without a charge to capital gains tax or LBTT but only if certain conditions are met. There is a need to act quickly and take advice early to check that incorporation may be achieved without a tax charge, and if, depending on the circumstances of the individual, incorporation is beneficial.

If you have a question about property tax changes, please email our specialist Property Group at property@chiene.co.uk.

Mortgage Interest Relief for Residential Landlords

Measures announced in the April 2015 Budget which impact on residential landlords took effect from 6 April 2017.  Previously, relief for finance costs, primarily mortgage interest, was deducted in full from property income to arrive at the level of taxable rental profit. Under the new rules, a basic rate reduction, equal to 20% of the interest paid, will be applied to an individual’s tax liability for any finance costs incurred.

This change is being phased in over four years, commencing 2017/18, with the amount of deductible finance costs reducing by 25% each year, and the amount that may be claimed as a reduction to tax increasing by 25% each year as follows:

Year % of Interest Deducted from Rent % of Interest with Relief at 20%
2016/ 17 100% Nil
2017/ 18 75% 25%
2018/ 19 50% 50%
2019/ 20 25% 75%
2020/ 21 Nil 100%

For Example

The landlord in this example has a portfolio of residential properties which is his only source of income.  His net rental income after deducting expenses such as repairs is £110,000 and from this he pays loan interest of £70,000.

2016/ 17 2017/ 18 2018/ 19 2019/ 20 2020/ 21
Net rental income 110,000 110,000 110,000 110,000 110,000
Less: interest (70,000) (52,500) (35,000) (17,500)             
40,000 57,500 75,000 92,500 110,000
Less: personal allowance (11,000) (11,500) (11,500) (11,500) (6,500)
29,000 46,000 63,500 81,000 103,500
Tax @ 20% 5,800 6,300 6,300 6,300 6,300
Tax @ 40% 5,800 12,800 19,800 28,800
Less: basic rate reduction              (3,500) (7,000) (10,500) (14,000)
Tax payable 5,800 8,600 12,100 15,600 21,100

 

This landlord was a basic rate taxpayer in 2016/17. The restriction to the relief for loan interest, results in him paying tax at the higher rate from 2017/18. By 2020/21, the landlord’s tax liability has increased by more than £15,000. In 2020/21, when no deduction can be taken for the loan interest, the landlord’s income is £110,000. The personal allowance is reduced by £1 for every £2 over £100,000, meaning that with an income of £110,000, the landlord’s personal allowance is reduced by £5,000 to £6,500.

Note: for the purpose of the above example, the personal allowance for later years is assumed to be the same as for 2017/18 and the basic rate band of 20% is assumed to be £31,500 for 2017/18 onwards. The landlord is assumed to be a Scottish taxpayer.

Converting a building to capitalise on ‘holiday staycations’? Read our VAT advice first!

Help for Furnished Holiday Let (FHL) owners with how to avoid an unexpected VAT bill.

With the pound in our pockets stretching less than it previously did against other currencies, many families are looking closer to home for their much-needed breaks. This has led to diversification in the UK holiday accommodation market with holiday lettings in cottages, converted barns and other “staycation” accommodation now competing with traditional hotels and bed and breakfast establishments.

Farms and estates can capitalise on this trend by utilising existing residential accommodation or converting barns and outbuildings to cope with the demand.

This article highlights some of the VAT issues associated with the provision of holiday accommodation and some VAT reliefs on works to such properties.

What is holiday accommodation?

In VAT terms, “holiday accommodation” includes any accommodation in a building, hut (including a beach hut or chalet), caravan, houseboat or tent which is advertised or held out as holiday accommodation or as suitable for holiday or leisure use, but excludes any accommodation in a hotel or similar establishment.

This definition is important as the letting of holiday accommodation is subject to VAT at 20%.  As traditional residential lettings are VAT exempt, some farm and estate business often overlook this fact.  If the farm and estate business is already VAT registered, VAT will have to be charged on the holiday rental income. If the business is not VAT registered, it will have to be mindful of the VAT registration threshold which is currently £83,000 in a 12 month period.

The imposition of a 20% VAT charge can impact on pricing particularly in areas where rates are competitive, so knowing VAT will apply at an early stage can allow the business to plan and adjust prices to maximise income and ensure that the venture makes sufficient profit.

VAT Recovery & Reducing VAT costs

One of the benefits of VAT registration and charging VAT on the holiday lettings income is that any VAT incurred on the running of the property can be recovered.  This can potentially include VAT renovation and repair costs and furnishings for the property itself.

As holiday accommodation often meets the VAT “dwellings” tests, some of the concessions available for reduced ratings on conversions and renovations to residential property are available, subject to certain conditions.  A 5% reduced VAT rate is available for conversions of buildings into residential accommodation and also for renovations to residential accommodation that has been empty for 2 years or more.  This concession is also available where changes are made to the number of “units” as a result of the work (e.g. converting one house into 4 apartments).

Whether your business is VAT registered or not, if you are considering venturing into the FHL sector we recommend you take some advice to ensure that savings are maximised and the VAT position does not impact on your profits.

If you have a VAT query contact Iain Masterton, Senior VAT Manager on 0131 558 5800 or email iain.masterton@chiene.co.uk.