Category Archives: Tax

Why does the taxman have it in for builders?

As salaried employees many of us will have our taxes paid for us. But for those running a business, there will usually be a period in which tax money is entrusted to the taxpayer. For example, retailers collect VAT from their customers and get the cashflow benefit of holding this tax in their own bank account for up to 4 months before handing it on to HMRC. Individuals and small companies pay taxes on profits and gains in a tax year up to 21 months after the income is earned. But there are stricter rules for builders and others in the construction industry.

In the early 1970s, the then Inland Revenue targeted the industry with a withholding tax scheme. The idea was that contractors would withhold the tax due on the earnings of their subcontractors, rather like PAYE employees. There were exemptions for contractors who could demonstrate good compliance with the tax system. It’s not entirely clear why the construction industry is targeted in this way and not, say, HMRC tax  advisors or senior barristers. Colleagues in practice at the time perceived the scheme as aimed at Irish workers who predominated in the industry at the time, and was perhaps reflective of wider societal prejudices.

The paper heavy scheme set up in the 1970s was subject to fraud, with forged exemption certificates – or vouchers representing credit for tax which has not actually been deducted – abounding. The system was tightened a little in 1999, and then computerised in 2006. Subcontractors had to register for taxes with HMRC, and were assigned a reference number. Contractors had to electronically verify the number provided against the contractor’s details, and were told by HMRC’s computers what percentage of tax to deduct. Even more recently, claims for credit for CIS deductions suffered are included in EPS submissions associated with employer payroll schemes.

Contractors need to make monthly returns to HMRC by the 19th day of the next month, and face penalties for late, incomplete or incorrect returns, or for late or missing registrations.

The rules as written cover a wide variety of trades and businesses, including property developers and tradesmen engaged in what HMRC deem “construction operations”. Even companies outside the property and construction sector who expend more than £1 million over three years on construction (except where the company will use the building for themselves) need to register.

In a new twist, from October 2019 HMRC are applying similar rules to VAT. Tax which would normally be included on subcontractor invoices to VAT registered contractors will be subjected to a reverse charge scheme. Instead of subcontractors collecting the tax and paying it on to HMRC, subcontractor invoices will include a statement that the reverse charge applies. There will be no tax payable by the subcontractor, and, assuming that the contractor can claim all input tax (i.e. – does not make exempt supplies) then there will be no tax payable by the contractor either.

Here at Somer Baker Prince Kurz LLP we have been helping businesses adopt to developments in this area for decades. We can assist contractors and subcontractors with registering for CIS, submitting returns and making the correct payments. We can provide advice and consultancy on transitioning to the new reverse charge VAT scheme, including help setting up software and invoicing to be compliant. In complex cases where there is doubt as to whether CIS applies, we can provide written advice for you. To find out more call us today on 020 8903 0337 or email support@sbpk.co.uk.


Enterprise and Seed Enterprise Investment Schemes

Category : Tax

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) were set up to encourage investment in riskier smaller businesses. The tax advantages on offer can be quite significant. In this article we explore the rules to qualify for the schemes and the benefits they can bring.

EISSEIS
Income Tax relief for investors30%50%
Available to directors or employeesNoNo
Relief can be carried back 1 yearYesYes
Roll over reliefCan be used to defer but not negate other capital gainsCan be used to defer but not negate other capital gains
ClawbackReliefs clawed back if shares are disposed of within 3 yearsReliefs clawed back if shares are disposed of within 3 years
Relief on investment lossesAgainst income or capital gains Against income or capital gains
Taxation of gainsNot taxableNot taxable
What the money must be used for?Preparations, R&D or operation of any trade other than 20% on excluded activities.The company must use the money for growth and development of revenue, customer base or number of employees.Preparations, R&D or operation of any trade other than excluded activities. The company must use the money for growth and development of revenue, customer base or number of employees.
Public exchange rulesAt the time of the share issue, the company’s shares may not be listed on a recognised stock exchange. Smaller exchanges such as AIM are not recognised.At the time of the share issue, the company’s shares may not be listed on a recognised stock exchange. Smaller exchanges such as AIM are not recognised.
Must be physically established in the UKYesYes
Maximum number of employees250 (499 for knowledge intensive companies)25
Ongoing tradeMust be set up on ongoing basis rather than to service specific projects or contractsMust be set up on ongoing basis rather than to service specific projects or contracts
 Time limit Must be within 7 years of first commercial sale (except for new product, new market, inevstment exceeded 50% of average turnover or knowledge intensive companiesMust be within 2 years of the state of a trade carried on by the company or another person who sold it to the company .
Subsidiary companiesCannot applyCannot apply
Parent companiesMust own more than 90% of subsidiary if subsidiary is carrying out the trade
Must own more than 90% of subsidiary if subsidiary is carrying out the trade
Gross assets before investmentCannot exceed £15m (relaxed rules for knowledge intensive companies)Cannot exceed £200k
Maximum annual investment per investor£1m£100k
Maximum investment holding per investor30%30%
Maximum investment£1m per investment, no more than £5 million in 12 year period£150k
Type of investmentOnly cashOnly cash
Risk to capital conditionsThe investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return.
The investor cannot make arrangements to take priority over other investors in the event of default or in the timing of payments in return of the investment.
The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return.
The investor cannot make arrangements to take priority over other investors in the event of default or in the timing of payments in return of the investment.

Making Tax Digital

Category : Accounting , Tax

You may have read in the press or received communications direct from HMRC regarding the introduction of Making Tax Digital. We set out to explain a little more about what Making Tax Digital is and how we can help you prepare.

What is Making Tax Digital?

HMRC is planning significant changes to the administration of tax. For the first time, the government has now mandated that business records must be kept electronically. A summary extracted from those records must be submitted electronically to HMRC every quarter using compliant software. The first tax to be affected will be VAT. Further changes are planned for income tax, including for landlords, but these have been deferred until at least April 2020. There are no immediate plans to submit every single transaction included in the business records to HMRC, but MTD lays the technical groundwork for this development in the future.

When does MTD for VAT start?

MTD comes into force for VAT periods beginning on or after 1 April 2019. There are certain exemptions for particular businesses (particularly charities, VAT groups, VAT divisions, overseas trades and annual accounting scheme users) deferring the start date to 1 October 2019.  There is a year’s grace period for businesses to establish compliant digital links (see below) between the business records database and the software.

What should I be doing to prepare my VAT registered business for MTD?

The most important issue now is to select an MTD compliant software package (see below). This is particularly important if you are dependent on industry specific software such as software for solicitors, garages, or estate agents.

If you have instructed SBPK to act for you on VAT matters and we file your VAT returns for you, we will be working with you to ensure your records are maintained on compliant software.

You can participate in trials for the MTD software by registering at https://www.gov.uk/guidance/use-software-to-submit-your-vat-returns

You will need: –

your government gateway ID and password.

your VAT number.

the address with which you are registered with HMRC for VAT.

your effective date of registration.

The latter details can be found on your VAT registration certificate (form VAT 4), or on HMRC’s website if you log in using your government gateway credentials.

Can I keep my VAT software separately from my business records?

The rule states that the underlying records software needs to be “digitally linked” to the submitting software. HMRC do not accepting typing or cut-and-paste. However, transferring complete files by USB stick, by file sharing sites on the internet or by email seem to be acceptable, provided the import process is automated. More integrated links involving direct transfer of data between filing and database software are also compliant.

What software is compliant with MTD?

HMRC have a list of compliant software on their website. There are some very low-cost providers which work with spreadsheets, but these products are unsophisticated and may not be suitable. There are a number of cloud based or desktop products which are MTD compliant, and we would be delighted to help you select the right software and assist with the transfer of accounting records.


Should I move my buy-to-let properties into a company?

Since the former chancellor George Osborne introduced cuts to landlord tax relief thousands of landlords have seen their costs rise and are looking for ways to mitigate the hit. The limited company route was touted as the solution. So is it?

Here’s what the government has done as part of their buy-to-let clampdown:

  • Phased out mortgage interest that can be claimed against rental income. By April 2020 mortgage interest won’t be an allowable expense for individuals and instead, there will be a 20% credit. For 40% or 45% higher or additional rate taxpayers, this means an effective 20 or 25% tax hike.
  • Scrapped the wear and tear allowance.
  • Introduced a 3% surcharge on stamp duty payable on the purchase of buy-to-let properties or second homes.
  • Increased capital gains tax on residential property by 10% to 28% or 18% for basic rate taxpayers.

The key to the limited company question is the changes to mortgage interest tax relief and wear and tear. Landlords who own property personally pay income tax calculated on the rental income generated by these properties, not just on the profit they made after mortgage interest. When a limited company owns property this is viewed as a business and all expenses are tax deductible. Landlords can still take the income from the company in the form of a dividend, and will pay tax on this only.

Looking at it in its simplest form, a mortgaged property should be better off in a company. Indeed, thousands of landlords have now opted for this route – figures from Countrywide show a fifth of all buy-to-lets are now held by company landlords.

However, there are many considerations to think about. Here are some:

Costs of transfer

If you want to transfer property in your name to a limited company it can be very expensive. This transfer of ownership will trigger a sale and repurchase and incur stamp duty with the 3% surcharge on top. If the property has gone up in value since purchase there is also a capital gains tax hit. Plus there will be legal, valuation and mortgage fees.

Gifting land at nil cost to the personal company controlled by the landlord or close family avoids neither stamp duty nor capital gains tax.

Corporate costs

On the whole, mortgage rates for limited companies are higher and they incur higher fees than personal ones.

Mortgagors typically ask for personal guarantees from the owner-managers of small property businesses, so any benefits from the limitation of liability are lost.

Companies have running costs. They incur corporation tax, require accounts and an annual confirmation statement to be formally filed.

The tax savings made by having the company own the property would need to outweigh the additional costs and administrative burdens of running a company.

Your current and future tax position

If you are looking to supplement your income while you work, then you may be better off not buying through a limited company as you will be taxed twice – as well as paying corporation tax, you’ll need to pay tax on the money you take out of the company. Corporation tax rates are currently at 19%. Dividends are tax-free for the first £2,000 with subsequent dividend tax rates at 7.5%, 32.5% or 38.1% depending on the level of your other income.

If your property investment is part of a long-term investment strategy and you only want the income for the future after you have stopped working then a limited company is more likely to suit.

An overview of the main tax costs to consider to understand if setting up a limited company makes sense for you:

  Property held personally Property held through a limited company
Tax when buying a property Stamp Duty rates plus 3% surcharge. Stamp Duty rates plus 3% surcharge.
Rental income taxation Subject to Income Tax at your marginal rate 20%/40%/45%. Profits subject to Corporation Tax at 19%.

If drawing an income through dividends the first £2,000 is tax-free but dividend tax rates at 7.5%/32.5%/38.1% apply on top of Corporation Tax.

Mortgage interest tax treatment In 2018/19 you will be able to deduct 50% of costs from rental income before tax due, reducing to 25% next year.

By April 2020 mortgage interest won’t be an allowable expense for individuals and instead there will be a 20% credit

Mortgage interest is an allowance deductible expense.
Tax when selling a property Capital Gains Tax at 18/28%  –   depending on whether you are a basic or higher rate taxpayer after £11,700 annual exemption. Subject to Corporation Tax at 19%.
Other taxes   Annual Tax on Enveloped Dwellings applies to properties worth £500,000 or more. 100% lettings relief is available but a return must be filed.

 

The general view is that it can be very useful when you have a number of buy-to-let properties. For landlords with perhaps one property, it’s not worth it.

What’s clear is that you will need to do some thorough sums in order to work out exactly what difference going the corporate route will make to your finances.

To get some professional advice contact Shaya Grosskopf.

 

 


Employment and Self-Employment

A quick look into the complicated and increasingly fuzzy differences between employment and self-employment.

The tax position

Overall, the self-employed enjoy tax advantages compared to their employed colleagues.

  1. A self-employed worker pays lower rates of national insurance (at the time of writing: 9%, or 2% on earnings above £46,350).
  2. There is no benefit in kind tax on private use of business vehicles.
  3. Expenses which are wholly and exclusively for the purposes of business can be claimed as deductions against taxable profits, while employee expenses adds a further condition before they can be claimed – expenses must be wholly, exclusively and necessarily incurred in the course of their employment.
  4. Self-employed workers also have the cashflow advantage of paying tax due on their earnings in the tax year ending on 5 April in two instalments at the end of the succeeding July and January. Employees have tax deducted from their earnings when it is paid.
  5. Self-employed workers often have the option to direct the profits of their business to limited companies, which can have significant tax benefits.
  6. Self-employed workers can pay salaries to family members, reducing their own taxable profits, and utilising the family member’s tax-free personal allowance. The salary must be paid on a genuine commercial basis for actual services provided and must actually be paid. Employees would have no such flexibility.

However, the self-employed must go through the bureaucracy of completing a self-assessment tax return. In general, and with many exceptions, employees earning less than £100,000 do not need to complete a return.

What about the employer?

Hiring a self-employed worker rather than an employee has advantages to the employer too: –

  1. Employers pay employer’s national insurance contributions (currently 13.8% of gross earnings) and pension contributions (currently 1%) for most employees
  2. In theory, self-employed contractors have little or no employment rights in matters such as sick pay, paid holiday leave and parental or maternity pay.

Recent supreme court judgements concerning section 230 of the Employment Rights Act 1996 seems to grant protected “worker” status to the self-employed where “an individual undertakes to do or perform personally any work or services” including whistle-blower and unfair dismissal protections. This creates a fuzziness between

Commercial risk

Self-employed workers (other than those who trade through limited companies) are in business on their own account. The law does not distinguish between a creditor’s claims on their private and personal assets.

Self-employed contractors’ employment rights are curtailed as set out above.

However, employees also face significant risks. They may lawfully be made redundant with only a small entitlement to statutory redundancy pay if their employer’s business requires it.

Is self-employment a choice?

The courts have been consistently clear that merely signing a contract that states that an employee is self-employed does not automatically render that employee self-employed if the substantive relationship is one of employment.  The following factors are relevant to determining whether a relationship constitutes employment or self-employment

  1. Mutuality of obligation. This refers to the obligation of an employer to provide work and pay for it, and the corresponding obligation of the employee to personally do the work. However, the use of zero hour contracts, whose classification as employment has never been subject to doubt, does challenge this notion.
  2. A line managed worker carrying out a regimented task – particularly one carried out simultaneously by other workers such as a warehouse packer – is unlikely to be classified as self-employed. Skilled employees such as software developers enjoying substantial independence in carrying out their jobs are more likely to be construed as self-employed.
  3. Set hours and a set place of work are associated with employment.
  4. The right of substitution rather than a requirement of a worker personally carrying out work is a valuable indication of employment. HMRC have recently lost a case in which they sought to assert an employment relationship predicated mainly on a lack of right of substitution.
  5. Typical commercial arrangements such as the worker using their own tools, having multiple clients, and especially no one predominant clients, marketing their services widely, or obtaining their own insurance are indicators of self-employment.

Despite decades of different cases, exactly how these different factors are to be weighted is unclear.  Recently a number of examples have arisen of workers being granted employment rights while taxed as self-employed, which makes for a very confusing position for businesses looking to comply with the law.

Limited companies and LLPs

It used to be the case that using specific legal intermediaries – such as LLPs or companies – would make what would otherwise be an employment relationship into a contractor or self-employed relationship.

Members of LLPs are now taxed as employees unless they substantially participate in the risks, decision making, and rewards of the LLP’s trade.

Companies which provide services on what would otherwise be a contract of employment are required to pay tax as though they were an employee under the “IR35” rules. Exactly which types of relationship are caught under these rules is a complex and still evolving area of law.

 


Making Tax Digital

What is making tax digital for business?

It’s a government scheme to change the way that accounting information is recorded and transmitted to HMRC.

How does it affect my business?

The earliest impact on businesses will be the requirement for VAT registered businesses to file their vat returns using Making Tax Digital (MTD). This means that you will need to do your bookkeeping and vat returns on MTD compliant software, and you can no longer use the existing (free) HMRC website.

What do I need to do?

You need to work with your software provider to ensure that the software will be compatible with MTD. If your bookkeeping software will not be compatible, you will need to change providers.

Can I carry on using my existing bookkeeping software and just put summary totals into the MTD compliant software to file my return?

No. HMRC require that the MTD system must have digital access to the underlying transactional records. Automated (API) links between existing software and an MTD compatible system are acceptable and may be useful for individuals with specialised or excel software.

Typing in summary totals with your digits does not count as a digital link!

When does it start?

The changes take effect for VAT returns covering a period beginning on or after 1 April 2019.

How can SBPK help?

We are delighted to be able to offer you training on a variety of modern cloud and standalone systems which are compatible with Making Tax Digital.

We can help move your data over from legacy systems to newer MTD compatible systems.

We also provide a complete outsourced bookkeeping and VAT service which will of course be MTD compliant.


Sign up to our newsletter