Displaying items by tag: VAT

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Just one month to go until the so-called “Domestic Reverse Charge” will apply to VAT registered traders who are also registered to use the Construction Industry Scheme.

There has been an awful lot of commentary in the press claiming that from 1 October, building contractors will be lumbered with paying their sub-contractors’ VAT.

Perhaps a brief summary of the reason for this change would be useful.

HMRC has noted that a growing number of sub-contractors are registering for VAT, adding 20% VAT to their invoices, collecting this VAT charge from their customers and then disappearing without passing on the VAT collected to HMRC. Needles to say, HMRC are not too pleased with this trend.

And so, from 1 October 2019, VAT registered subcontractors invoicing their work to other CIS registered firms will not charge VAT on the supply. Instead they will advise the main contractors that their supply is subject to the reverse charge process.

Prior to 1 October, contractors would simply pay the VAT inclusive amount to their VAT registered sub-contractors and then claim back the input VAT paid on their VAT return.

After 1 October, contractors will pay the net of VAT amount to their sub-contractors and then make two adjustments to their VAT return: firstly, adding the sub-contractors VAT to their output tax, and at the same time, claiming back the same amount as input VAT.

Accordingly, contractors will pay their sub-contractors VAT, but in the same breath they will claim it back – subject to the usual rules.

The mechanics of accommodating the accounting entries to cope with the new process can be programmed into your bookkeeping software. However, there could be complications if you use one of the VAT special schemes, such as the cash accounting or flat rate scheme.

We recommend that you take professional advice before 1 October, to make the changes required to your invoices and accounts software and to make sure that you do not need to change your present VAT scheme.

Please call if you would like our help to do this.

If there was a measure of stability in UK politics, we would be expecting the usual dispatch-box presentation by the Chancellor before Christmas. The annual budget is usually presented November each year.

This may still happen this year, but present uncertainties regarding the Brexit outcome, and the present government’s slim majority may scupper that timetable – we may have two budgets this Autumn or none at all.

Never-the-less, we will advise if and when a date is agreed. If we do leave the EU with no-deal, gripping the sides of your chair may be in order as the fiscal changes required (changes to taxation) to meet the resulting economic consequences, may be significant.

We will keep you posted.

In much the same way that we make judgements about our personal fitness: are we overweight, do we get enough exercise, do we eat the right food; similar judgements can be made about your business.

There is also a raft of external pressures that we have to consider as individuals. For example, if you are about to run a marathon your diet and daily exercise will need to prepare you for the physical demands of the coming event. Simply continuing a couch potato regime will inevitably lead to disaster.

In much the same way, we not only need to meet current demands when we sit down to manage our business activity on a day by day basis, we also need to keep a weather eye on changes to the economy and the antics of the politicians that pull the strings.

If a slow-down in activity is likely, for whatever reason, the demands on your business will likely result in lower sales, pressure on your profit margins, a reduction in cash balances and downward pressure on your earnings from the business.

Compare this with a rapid up-turn in economic activity. You will need sufficient cash reserves to meet increased sales, investment in stock and possible increased staffing costs.

In both cases, significant changes will make similar demands on your business cash flow, and whilst the details will differ, to survive these changes we need to be prepared, we need to manage our business fitness.

Without a doubt, losing the ability to move goods and personnel across Europe is probably the most dramatic change in the UK’s ability to trade in the EU since we first joined in the 1970s. Even if our business does not actively trade with companies in the EU, it is highly likely that a number of our suppliers and customers may do so.

How will this affect your business? What plans do you have in place to counter any down-side risks?

We suggest that undertake a formal risk assessment to identify and counter financial pressures that you may face after 31 October 2019. Please call so we can help you ready your business for the coming changes. The clock is ticking.

We have alerted building contractors and sub-contractors in previous newsletters of changes to the VAT rules from 1 October 2019.

In a nut-shell, if you are subject to the Construction Industry Scheme and if you are registered for VAT, from the 1 October 2019 you may need to change the way you account for VAT on supplies between sub-contractors and their contractor customers.

At present, sub-contractors registered for VAT are required to charge VAT on their supplies of building services to contractors. From 1 October this approach is changing.

From this date sub-contractors will not add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers.

This does not mean that contractors, in most cases, are paying their sub-contractors’ VAT as an additional cost.

When contractors pay their sub-contractors’ VAT to HMRC they can claim back an equivalent amount as VAT input tax; subject to the usual VAT rules. Accordingly, the two amounts off-set each other.

The change is described as the Domestic Reverse Charge (DRC) for the construction industry. It has been introduced as an increasing number of sub-contractors have been registering for VAT, collecting the VAT from their customers, and then disappearing without paying the VAT collected to HMRC.

Beware cash flow concerns

However, the change to DRC may create cash flow issues especially if you use the VAT Cash Accounting Scheme or the Flat Rate Scheme.

We recommend that all affected CIS readers contact us so we can help you make the necessary changes to your invoicing and accounting software and reconsider the use of VAT special schemes if your continued use would adversely affect your cash flow.

If you are setting up a new business one of the options, you will need to consider is your business structure. There are two basic choices:

1. Be self-employed, or
2. Incorporate your business, be a limited company.

There is a world of difference between the two options.

Self-employed

Self-employed suggests that you work on your own, and this is certainly one self-employed option, but there are others.

You could have a business partner, or partners, and trade as self-employed but in a formal partnership arrangement. There are two basic types of partnership: a limited partnership (where the partners are not personally liable for any business risks) and a non-limited version where the partners’ personal assets are at risk in the event that the business cannot pay its debts.

This personal liability aspect is one of the key reasons that need to be considered when deciding on a structure for your business. The other is the impact of NIC and income tax.

If you are self-employed the profits of the business are taxable based on the tax status of the business owner or owners. There is no flat rate applied to business profits. The more you earn, the more NIC and income tax you will pay. And don’t forget, if you are self-employed and you run into financial difficulties, your personal assets may be at risk – unless you have opted for the Limited Liability Partnership arrangement.

A limited company

Alternatively, you could set up a limited company that is treated as a legal entity in its own right. Companies pay corporation tax, not income tax, at a single rate, presently 19%.

At first sight it may seem like a no-brainer, why would you be self-employed and pay much higher rates of NIC and income tax? Combine this with the limited liability aspect and the argument for trading as limited seems compelling.

Planning is key

Every potential new business-person should consider both options. There are pluses and minuses to each, and both need to be considered.

If you are thinking about a new business, perhaps your first venture into self-employment, please call so we can help you consider all the possibilities. This is not a process to be taken lightly and messing up could prove to be very expensive.

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