July - Monthly Round up
VAT reverse charge for building and construction from October
New rules come into force in October for VAT-registered firms reporting under the Construction Industry Scheme (CIS) as part of HMRC’s attempt to tackle fraud in the industry.
Fraudsters who set up companies in order to siphon off VAT and then close within months before paying anything to HMRC, have started operating in the construction industry. As measures have been taken in other sectors to close them down, the fraudsters have sought out other industries to exploit.
The domestic reverse charge (meaning UK-only) will be introduced from 1 October and means that businesses receiving certain services will have to pay VAT directly to HMRC instead of the supplier of those services. This removes the flow of money from VAT between businesses, with the onus on the recipient of services to account for the VAT.
Those affected include sole traders and individuals working as contractors, or sub-contractors to larger contractors, or through agencies. CIS registered companies and companies invoicing non-CIS registered clients will continue to charge VAT as usual.
The charge applies only to supplies subject to standard or reduced rate VAT, not to zero-rated supplies or suppliers below the VAT threshold. VAT accounted for under the charge will not count towards the VAT registration limit for the recipient.
The specific services targeted include:
- installations of systems such as heating, air-conditioning, power, drainage, sanitation etc.
- internal or external painting and decorating
- construction, demolition, repair or alteration of any structures.
Excluded from the reverse charge are professional work from surveyors and architects, machinery delivery or installation of security systems.
Any contracts that are only partially completed by the October start date will have to be reviewed to assess whether the new charge needs to be applied to unfinished elements of a project. Subcontractors will need to plan for cashflow implications as previous, perfectly legitimate, uses of VAT around cashflow will disappear.
HMRC has said that it will apply a ‘light touch’ on any penalties for the first six months to allow firms to transition to the new regulations. If businesses are seen to be trying to comply with the new rules, and correct any errors as soon as possible, they should avoid being penalised.
There are several areas still to be clarified, but if you or your business may be affected from October, let us know.
Getting to grips with the tax gap
HMRC did not collect 5.6% of the tax revenue due for 2017/18 according to its annual report on the tax gap. And the biggest increase in shortfall was from smaller businesses and individuals.
The £35bn missing from expected tax receipts is a new record in cash terms, with an increase of £2bn on the previous year. Tax evasion and criminal activity together with small businesses failing to pay are the main culprits.
Some analysts believe the figure to be much greater since the figures do not include profit shifting by large multinationals, such as Apple or Google, or the hidden economy. What the report does show, however, is a particular shortfall of £14bn from smaller firms which is almost double that of larger companies.
Closer analysis reveals a steep rise in the amount of unpaid self-assessment tax. A total of £7.4bn was not collected, up more than 10% on the previous year. At the same time the PAYE tax gap improved marginally, down from 1.1% to 1%. For income tax, National Insurance contributions and capital gains tax, the overall figure was £12.9bn or 3.9% of all potential liabilities.
A combination of tax complexity and an under-resourced HMRC appear to underlie the figures. Fewer random audits have been carried out in recent years, while the number of targeted audits, which have been shown to bring in up to four times their cost to carry out, have also decreased. Staff redeployed to focus on Brexit issues has also contributed to resourcing issues.
One interesting contributory explanation is a figure of £6.2bn of tax lost due to differing “legal interpretation” of tax rules between the Revenue and taxpayers. With some recent high-profile cases around IR35 going against HMRC’s interpretation of its rules, there are increased calls for simplification and clarity.
HMRC is the only tax authority to publish estimates of uncollected taxes. However, they are only estimates, and the methods used to calculate them have been questioned. But with the published tax gap figures apparently equivalent to the housing and environment budget, or the public order and safety budget (depending on which reports you read), the problem goes beyond HMRC’s issues to the heart of the compact between taxpayers and society.
Parents receive HMRC penalties reprieve
Around 6,000 parents have had their penalties cancelled for failure to notify HMRC that they were liable for the high income child benefit charge (HICBC). This is unlikely to be repeated, so families need to be aware of their position.
Around 1.4 million families lose some or all of their child benefit because one of the parents earns over £50,000 a year. As soon as one partner earns over £50,000, child benefit is gradually withdrawn via a tax charge. The whole benefit is lost once earnings exceed £60,000.
One of the main criticisms of the HICBC has been around its practical implementation, with many more taxpayers drawn into self-assessment who had previously been taxed through PAYE. By tying the charge to the higher earner in a family, who is generally not the person claiming the original child benefit, HMRC is also applying the charge to the family income through an individual. The onus is on the individual higher earner to notify HMRC when they tip over the threshold.
Since the 2013/14 tax year – when the charge was introduced – 35,000 families have received failure to notify penalties for liabilities through 2015/16. Following a number of challenges, HMRC instigated a review of all the failure to notify penalties issued. Where they found a ‘reasonable excuse’ for a failed notification under certain criteria, penalties would be cancelled or refunded. In the end, of the 6,000 cancellations, 4,885 received refunds.
How it works
The £50,000 HICBC threshold applies to each individual. The benefit is paid in full, for example, if both parents earn £45,000 (creating a joint income of £90,000). But as soon as one parent earns over £50,000 – even if the other does not work – they’ll be hit by this charge. Parents can opt out of receiving child benefit, but they should still register to receive National Insurance credits if one partner is not working.
The tax charge can be reduced by increasing pension contributions to reduce taxable pay to below the relevant threshold in some cases. Remember though, money in a pension cannot be accessed until at least age 55.
HMRC has said that for tax years from 2016/17, they expect the higher earner in a couple to notify them where their income exceeds the HICBC threshold, on the assumption that any parent claiming child benefit since the charge was introduced will now be aware of it.
If you have any questions about your family’s tax position, get in touch with our tax team who will be happy to discuss this with you.
The implications of the over-75 licence problem
While the row over the BBC’s decision to scrap universal free TV licences for the over-75s has focused on the impact on those affected, it also forms part of the ongoing broader debate around inter-generational fairness.
Free TV licences for the over-75s were introduced by Gordon Brown in his 2000 Budget. At a relatively modest initial cost, it seemed a straightforward, crowd-pleasing measure.
Fast forward to 2015 and a government looking to ease spending cuts discovered a way to deal with the rising cost of free TV licenses: it passed the problem onto the BBC. In exchange for government agreement on a financing deal that provided an index-linked licence fee and closed loopholes on catch-up TV, the broadcaster accepted the poisoned chalice of responsibility for the free licence scheme from 2020.
Regardless of the expected political outcries, it always looked as if the BBC would be forced to drop the universality of 75+ free licences. As the corporation has pointed out, maintaining the status quo would cost £745m – a fifth of its total budget.
A look at population numbers casts an interesting light on the over-75s issue and the wider implications of that cost. National Statistics data show that in 2000 the UK had 4.37m people aged 75 and over. By 2020 the corresponding figure is projected to be 5.84m – an increase of 1.47m or about one third.
The overall population is projected to have grown by about a seventh over the same period – less than half the pace of the growth in over-75s.
Simply on the basis of over-75 population growth and the increase in licence fee, the cost in 2020 would be double that of 2000. From this angle, the argument around free TV licences is a lens through which the much larger issue of an ageing population and intergenerational fairness comes into focus.
It is also a reminder that relying on the state to fund a comfortable retirement could mean losing much more than your favourite TV shows.
Does inheritance tax have a future?
While inheritance tax (IHT) comes under scrutiny from the government, a paper presented to the Labour Party has suggested it should be abolished.
Labour Party proposals to kill off IHT and replace it with a gifts tax were reported across several newspapers last month. The coverage was somewhat creative, as the idea was in a paper prepared for the Labour Party primarily focused on reforming the taxation of land. The gifts tax section covered just half a page and did little more than revive a structure proposed over a year ago by the Institute for Public Policy Research (IPPR).
These proposals are not yet Labour Party policy – they will only be considered when the party prepares its manifesto for the next election, which could be as far away as 2022. However, it’s worth considering how IHT might be transformed into a gifts tax.
The major change proposed is that liability would shift to the recipient of a gift or legacy, instead of the person making the gift or bequest. This approach is common in other countries which levy estate taxes. The IPPR framework would make gifts and bequests totalling £125,000 (indexed to inflation) over a lifetime free of tax. Beyond that threshold, any amount received would be treated as income and taxed accordingly. The new tax would raise almost three times as much as IHT. The paper on land tax reform added one tweak to the IPPR proposals: a new tax on equity release which it described as a “key means of avoiding inheritance tax”.
Despite the relatively few estates that end up paying IHT, it is generally regarded as the UK’s most hated tax. However, IHT is much easier to sidestep than a lifetime gifts tax would be. Under IHT, the general principle is that outright gifts only enter the IHT calculation if they are made within seven years of death.
In a rare cheering move, the government announced in June that compensation payments from the German government to survivors of the Kindertransport, rescued prior to the Second World War, will be not liable for tax as part of those individuals’ estates.
If the impact of IHT on what your children and grandchildren will receive concerns you, now could be a good time to discuss with us the ways in which you can take advantage of the generous treatment of lifetime gifts…while it lasts.