August 2019 Tax Update
Welcome to our monthly tax update, helping to ensure you’re always in the know…
In this month's Enews we report on changes being introduced from April 2020 including the extension of the off-payroll working rules to the private sector, the introduction of a new Digital Services Tax and Private Residence Relief changes.
We also consider HMRC insolvency hierarchy changes and the VAT reverse charge for the construction industry. With wage growth at a high, a reminder on Tax-Free Childcare and how to spot HMRC scammers there is lots to consider.
- Off-payroll rules for the private sector
- Digital Services Tax
- Insolvency hierarchy changes
- Private Residence Relief changes
- Working parents may be eligible for tax-free childcare this summer
- VAT changes may cause construction chaos
- Wage growth at a high
- Updated guidance on spotting HMRC scammers
The government has published the draft legislation for the next Finance Bill including the rules for off-payroll working in the private sector. The legislation is open for consultation until 5 September 2019.
The new rules will apply from April 2020 and the effect of these rules, if they apply to intermediaries, typically Personal Service Companies (PSC), will be:
- the medium or large business (or an agency paying the PSC) will calculate a 'deemed payment' based on the fees the PSC has charged for the services of the individual
- generally, the entity that pays the PSC for the services must deduct PAYE and employee National Insurance contributions (NICs) as if the deemed payment is a salary paid to an employee
- the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the deemed payment
- the net amount received by the PSC can be passed onto the individual without the company deducting any further PAYE and NICs.
Please contact us for advice on how these changes will impact your business.
Internet link: GOV.UK finance bill
From April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. However, this only applies when the group's worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.
Jesse Norman, Financial Secretary to the Treasury and Paymaster General, said:
'The UK has always sought to lead in finding an international solution to taxing the digital economy. This targeted and proportionate Digital Services Tax is designed to keep our tax system in this area both fair and competitive, pending a longer term international settlement.'
Internet links: GOV.UK news GOV.UK publications
From 6 April 2020, insolvency legislation will be amended to move HMRC up the creditor hierarchy for the distribution of assets in the event of insolvency by making HMRC a secondary preferential creditor in respect of certain tax debts held by a business (this includes individuals and partnerships) on behalf of their customers and employees. This includes VAT, PAYE income tax and CIS deductions.
The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer National Insurance contributions.
In addition, directors and other persons connected to companies subject to an insolvency procedure will be made jointly and severally liable for amounts payable to HMRC by the company in certain circumstances. This will apply mainly in cases where the company has engaged in avoidance, evasion or 'phoenixism'.
Internet link: GOV.UK insolvency
The government published draft legislation for the next Finance Bill including draft clauses on the changes to Private Residence Relief (PRR). The draft legislation is subject to consultation which closes on 5 September 2019.
Following consultation this Spring, changes are proposed to the Private Residence Relief (PRR) regime from April 2020. For properties that have not been occupied throughout the period of ownership, available deductions for capital gains tax purposes will be limited as follows:
- the final period exemption will be reduced from 18 months to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home) and
- lettings relief will be reformed so that it only applies in those circumstances where the owner of the property is in shared-occupancy with a tenant. Letting relief will be restricted or curtailed for disposals on or after 6 April 2020, regardless of when the period of letting took place.
Brian Slater, Chair of CIOT's Property Taxes Sub-committee, said:
'HMRC need to put the 'PR' into 'PRR' and publicise these changes effectively.'
'Many home owners are still unaware that the final period exemption was reduced from 36 months to 18 months in 2014. A further reduction to just nine months is likely to bring more property disposals within the scope of CGT. Whilst the average time to sell a property is around four and a half months, there will be many exceptions due to regional variations, separation and divorce, and other complexities.'
Another aspect of the relief which is also changing from 6 April 2020 is lettings relief, limiting it to narrowly defined circumstances in which the owner shares occupation of their house with a tenant.
Brian Slater continued:
'The practical effect of these changes will be that very few sellers will qualify for lettings relief if they sell their home after 6 April 2020. Further, any 'accrued' letting relief will be lost, as no apportionment can be made between gains attributable to pre and post 6 April 2020 disposals. Again, this change brings more disposals within the scope of CGT.'
Internet links: GOV.UK changes to CGT ancillary reliefs CIOT press release
The government is reminding working parents that they could ease this summer's childcare costs by using Tax-Free Childcare (TFC). The scheme is worth up to £2,000 a year for each child and allows parents to save regularly for childcare costs. For each £8 saved the government will make a top-up payment of £2. The money saved can be put towards a range of registered childcare options from more than 68,000 childcare providers. These include summer camps across the UK, as well as before and after school care during term time, nurseries and childminders.
The scheme is open to working parents, including the self-employed, who earn between the 16 hours a week at the minimum wage and £100,000 per year and have children under the age of 12 (or under 17 for children with disabilities).
The government will top-up up to £500 per quarter for each child, or £1,000 if the child is disabled.
Commenting on TFC, Liz Truss, Chief Secretary to the Treasury, said:
'We understand making arrangements for summer childcare at this time of year is important and can be a stressful time for parents.'
'TFC makes things easier, putting more money in the pockets of parents and supporting as many families as possible to secure high-quality, affordable childcare.
'Parents should visit the Childcare Choices website and take advantage of the range of offers to help balance their work and family lives while saving money.'
Internet links: GOV.UK news Childcare choices
The Federation of Master Builders (FMB) is warning that a major change in the way that VAT is accounted for in the building and construction sector which takes effect later this year may cause chaos.
The VAT domestic reverse charge for building and construction services applies from 1 October 2019. It is an anti-fraud measure - an administrative change, impacting invoicing and VAT return procedures. With a reverse charge, a VAT-registered recipient of services accounts for VAT, rather than the supplier.
The rules will apply to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS), the charge will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services.
With the new rules, suppliers (VAT-registered subcontractors), will state on their invoices that supplies are subject to the reverse charge. Contractors will then use their VAT returns to account for output VAT on supplies received, instead of paying output VAT to their suppliers. Subject to normal VAT rules, the contractor can reclaim VAT on supplies received as input tax, usually leaving no net tax payable on the transaction. Where there is an 'end user', it will be expected to provide notification of end user status to suppliers, signalling that a supplier should charge VAT as usual.
Reverse charge will not affect zero-rated supplies: nor some circumstances where suppliers are connected to end users, for example landlords and tenants. The reverse charge covers 'specified services' – essentially construction services as defined for CIS purposes.
Where services – such as those of architects, surveyors and some consultants – are supplied on their own, they are not covered by the reverse charge. If supplied along with supplies subject to the charge, the whole supply will be subject to the charge. The reverse charge also includes goods, where supplied with specified services.
The FMB are warning that the government has not properly prepared the construction industry for this major VAT change. New data from FMB shows that:
- over two-thirds of construction SMEs (69%) have not even heard of the reverse charge VAT and
- of those who have, more than two-thirds (67%) have not prepared for the changes.
Brian Berry, Chief Executive of the FMB, said:
'Construction companies are already struggling with Brexit uncertainty, sky-rocketing material price rises and skill shortages and reverse charge VAT is yet another thing for them to deal with. What makes things worse is that HMRC has failed to deliver on its promise to help the industry to prepare. The guidance is not user-friendly and even tax experts are scratching their heads over it.'
'It's therefore not surprising that the vast majority of construction SMEs are not aware of the impending changes, despite widespread promotion by the FMB. Small business owners are busy people and clearly they don't have time to read everything we send them. For those who are aware, they haven't had a chance to change their systems yet as they were waiting for guidance to be published that has only just emerged. That's why we are calling on the Government to delay the changes by another six months and to use the extra time to improve the guidance and work with us to undertake a more intensive communications campaign. HMRC should also consider holding workshops across the country to explain the changes.'
Businesses affected by the new rules are recommended to plan now to adapt accounting and IT systems. The reverse charge may also impact business cash flow. Please do not hesitate to contact us for further advice.
Internet links: FMB news GOV.UK guidance
Data published by the Office for National Statistics (ONS) has revealed that UK wage growth increased to 3.6% in the year to May 2019, the highest rate since the financial crisis in 2008.
According to the ONS, wages have been rising faster than inflation since March 2018 and that increases to the National Minimum Wage and the National Living Wage have helped wage growth to accelerate. However, the data also showed that average pay is still lower than pre-2008 levels. When average regular pay of £503 is adjusted for inflation to £468 per week it is £5 less than its pre-recession total of £473 a week.
Commenting on the data, Alpesh Paleja, Principal Economist at the Confederation of British Industry (CBI), said:
'Despite signs that employment growth is tailing off, the labour market remains tight, with the unemployment rate at a multi-decade low. It's encouraging that pay growth has picked up further, putting more money in people's pockets.'
'But as recent data shows, productivity remains in the doldrums. Reinvigorating efforts to boost productivity is critical. Firms must focus on innovative ways to share new ideas and invest in people and technologies.'
Internet links: GOV.UK bulletins CBI article
HMRC has updated their list of examples of websites, emails, letters, text messages, WhatsApp messages and phone calls used by scammers and fraudsters to obtain an individual's personal information.
The guidance can be used to help you decide if a contact from HMRC is genuine and provides examples of the different methods that fraudsters use to get individuals to disclose personal information.
You can also read about how to recognise genuine contact from HMRC, and how to tell when an email is phishing/bogus.
Internet links: GOV.UK genuine contact examples GOV.UK phishing examples
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