More information from HMRC on Making Tax Digital

On 13 July 2018 HMRC published further information on Making Tax Digital (MTD) for businesses and agents in the run up to the start of the mandatory MTD VAT service from 1 April 2019.

From April 2019 all VAT registered businesses (including charities) with a taxable turnover above the VAT threshold (£85,000) are required to keep their VAT business records digitally and send their VAT returns using Making Tax Digital (MTD) compatible software. Businesses with a taxable turnover below the VAT threshold will not have to operate MTD, but can still choose to do so voluntarily.  A reminder of key principles behind MTD for VAT can be found in our previous article here.

The information includes:

  • A new HMRC VAT Notice. The VAT Notice 700/22  gives guidance on the digital record keeping and return requirements of MTD for VAT including:
    • Who needs to follow the MTD rules and from when;
    • The digital records businesses must keep, and a series of HMRC directions that relax these requirements in certain circumstances (such as where a mixed rate supply is made, where a third party agent makes or receives supplies on behalf of a business, and where a business uses a special VAT scheme such as a retail scheme or the Flat Rate Scheme);
    • How businesses must use software to keep digital records and file their returns from those digital records, including information on when programs do and do not need to be digitally linked in situations where a combination of software programs is used.
    • A number of illustrated examples to show customers how to ensure their specific set-up will be compliant with the regulations from April 2019
  • A page on GOV.UK providing a list of software developers  HMRC is currently working with that have already demonstrated a prototype of their product ready to start testing with businesses and/or agents. Over 35 of these have said they’ll have software ready during the first phase of the VAT pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.
  • A communications pack to provide stakeholders with information to support businesses and agents to prepare for MTD.

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HMRC consult on new way for building traders to account for VAT

Under rules to come in on 1 October 2019 builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.

The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.

Following an initial consultation in March 2017, HMRC has now published draft legislation, a draft explanatory memorandum and a draft tax information and impact note on the so-called “Reverse Charge (RC) for construction services”. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.

Under the new rules, supplies of standard or reduced rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.

The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.

Type of work affected

Despite the rather misleading reference to ’construction‘ the RC will in fact apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.

Excluded works

Some works will not be covered and invoicing for these will not change. These include

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Questions and preparation

In addition to the technical consultation HMRC has been engaging with trade bodies, and discussions are ongoing.

One of the main concerns is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ’white goods‘ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.

The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. But this is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cashflow projections will also need to adjust.

Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.

VAT – care homes and hospitals

In Revenue and Customs Brief 2 (2017) HMRC announce they have revised their policy on the definition of ‘personal care’ for the purposes of deciding when a new building can qualify for zero-rating as a care home, or is treated as a standard-rated hospital.

Following the decision of the First-tier Tribunal in Pennine Care NHS Trust (TC04998), HMRC now accepts that besides providing for lengthy periods of residence, ‘personal care’ in a care home may also involve a high level of medical treatment. A treatment centre incorporated within a care home and used at least 95% by the residents of that home will qualify for zero-rating. Businesses may be able to recover VAT previously paid on supplies of construction works which would have been eligible for zero-rating under the revised policy, subject to the four-year limit on claims.

 

 

Spring/Summer Newsletter

Welcome to our Spring/Summer news update. It’s been a busy few months since our last update in January. There’s more detail in the links below.

Brexit

The triggering of Article 50 and the UK’s eventual departure from the EU will have a major impact on UK VAT in the future as we discuss here.

Making Tax Digital

HMRC’s proposals to ‘Make Tax Digital’ will eventually affect how all businesses make tax and VAT returns (though there is a proposed exemption for charities) and is likely to require all businesses to adopt digital accounting and /or adapt their software packages. Whilst the legislation was cut from the Finance Bill due to the election we are told this is a deferral only. There is more detail on the proposals here.

Cultural and Educational exemptions

The European Court has recently decided that the UK is entitled to deny exemption to film screenings by non-profit making bodies in the case of BFI. That means there will be no extension of exemption to other areas, but Brockenhurst College was successful in arguing that the catering and theatrical activities its students provided to third parties were exempt because they were closely related  to the education of the students.

Holding companies

Finally HMRC have updated their guidance on deduction of VAT by holding companies  following cases hear on the CJEU. It was expected this would be issued as an HMRC brief but instead HMRC have updated several parts of their Manuals. This will affect recovery of VAT on mergers and acquisitions

As always if you have any questions on VAT give us a call on 0208 492 1901 or drop us an email.

 

VAT deduction by holding companies

HMRC have finally published updated guidance on recovery of VAT by holding companies. The update had been expected to take the form of a Brief which would be published on Gov.uk but instead HMRC have updated the VAT manuals (also on Gov.uk) instead.

Following the CJEU decision in the joint cases Larentia +Minerva, HMRC has been reviewing their policy in respect of holding companies and deduction of VAT incurred on acquisition costs.

The CJEU held that VAT incurred by a holding company on the costs of acquiring shareholdings in subsidiaries to which it also intended to provide taxable management services, must be regarded as part of a holding company’s general overhead expenditure and  thus as deductible (subject to any partial exemption restriction).

Prior to this case HMRC’s previous policy had been that VAT incurred on the acquisition costs of shares by a holding company was only deductible where it was directly attributable to the provision of taxable services.  They also considered that VAT on costs incurred by holding companies was only recoverable if the intention was to recoup the expenditure by providing taxable services to subsidiaries within a ‘reasonable’ period of time.

The guidance covers:

  • when a shareholding is regarded as bring used as part of an economic activity;
  • whether a holding company is the recipient of a supply;
  • whether a holding company is undertaking economic activity for VAT purposes;
  • whether a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company;
  • whether there is an intention to make taxable supplies;
  • contingent consideration for management services;
  • the effects of a holding company joining a VAT group;
  • stewardship costs; and
  • mixed economic and non-economic activities.

Businesses considering mergers, acquisitions and corporate restructures should read this guidance.

Revised VAT Notice 701/30 – Education

HMRC have issued a revised VAT Notice 701/30: education and vocational training (26 April 2017) which explains the VAT treatment of education, research, training, connected goods and services, and examination services.

The notice has been updated to explain the treatment of funds taken from the new apprenticeship service account to pay external providers for apprenticeship training with effect from 1 May 2017. This notice cancels and replaces the 25 February 2014 version.

Making Tax Digital – will you be ready?

HMRC issued six Making Tax Digital consultations in August 2016 which outlined its plans to modernise the tax system. The main proposal under consultation was the need for over 5 million businesses with turnover over £10,000 and those receiving rental income from properties, to submit quarterly updates of their business activity to HMRC digitally. The requirement is to keep records digitally using a method that is compatible with the MTD programme. HMRC have stated that they will publish a list of providers who offer compatible services. HMRC initially stated that free software would be available for this but so far details have not ben announced.

On Monday 20 March 2017 the draft Finance Bill was published confirming plans to go ahead with quarterly direct tax reporting for unincorporated businesses (sole traders) and landlords with turnover over the VAT threshold (£85,000 from 2018/19 tax year) from April 2018. Initially this will affect sole traders, landlords and the self-employed.

Those who are below the VAT threshold will have to start mandatory quarterly reporting from April 2019. Partnerships with fee income above £10m will have a deferral to April 2020, aligning them with limited companies which also begin quarterly filing from April 2020.

All VAT registered businesses irrespective of turnover levels will have to report VAT through the new system from April 2019 as current arrangements will be superseded and any online or paper submissions outside the Making Tax Digital IT system will not be permissible. At Budget 2017, the Chancellor confirmed that businesses will be able to continue to use spreadsheets for record keeping (a concern for many VAT registered traders who are partly exempt) but their software must be able to interact with those spreadsheets so that the requirements of digital reporting are met.

The £10,000 turnover entry limit is not mentioned in the bill so it appears that this may still be up for debate as part of the ongoing HMRC consultations.

Agents/accountants

The MTD process for agents is still being refined by HMRC. At the moment it appears that agents will be required to register for Agents Services to allow them to act on behalf of their clients under MTD. To register for this they will need to request a new “clean” set of user credentials from the Government Gateway and carry out a mapping process in order for any existing 64-8 relationships to be carried over to these new set of credentials.

Charities

The Government has confirmed that it will introduce legislation to exempt charities from the Making Tax Digital requirements. It is important to note however, that charities are exempt only from these new reporting requirements and clarification is being requested from HRMC on the process for charities managing their existing ongoing tax reporting requirements,

However, the Government has decided that charity trading subsidiaries should be within the scope of the MTD obligations. The Charity Tax Group had called for trading subsidiaries to be included within the exemption as a charity will often use a subsidiary to make its activities tax effective or to accommodate any trading activities, often a requirement dictated by administrative, legal and financial practicalities. As the charity is responsible for the administration of the subsidiary, processes and staff resources are often shared across the organisation. Therefore, if a charity subsidiary was required to comply with these rules, it would mean that the charity would have to operate two systems (which adds complexity) or consider maintaining digital records for the whole charity group, undermining the proposed exemption. CTG has also questioned how this will work with a charities registered with a subsidiary in a VAT group.

MTD implementation timeline

April 2017 – public testing opens

April 2018 – businesses with turnover above VAT threshold £85k

April 2019 – expanded to cover VAT Reporting and self-employed small businesses with turnover above £10k

April 2020 – corporations and partnerships with turnover above £10m

 

VAT: new rules for zero- rate relief on adapted motor vehicles for disabled wheelchair users

New rules for VAT relief on substantially and permanently adapted motor vehicles for disabled wheelchair users, which are intended to end the abuse of the current scheme, come into force on 1 April 2017.

The rules will specify a limit on the number of vehicles within a specified period of time that an individual can purchase, and require an electronic or written submission of the eligibility declaration form published on Gov.uk. Motor dealers selling adapted motor vehicles under this relief will also be required to provide sales information to HMRC within a specified time frame. Individuals who are in breach of these requirements may be denied zero rate relief or may be subject to a section 62 Value Added Tax Act (VATA) 1994 penalty if the declaration they make is incorrect.

The new rules include provisions allowing exceptions to the limit on the number of cars purchased, for example in cases where the medical needs of the wheelchair user change.

Further information can be found on Gov.uk here.

 

HMRC clarify their position on VAT incurred pre-registration

In Brief 16/2016 HMRC have clarified their position on claims for VAT incurred on assets used by a business prior to VAT registration.  Previously, in some circumstances, HMRC sought to disallow an element of such input tax.

HMRC now accept that VAT incurred on fixed assets purchased within four years of a business’s effective date of registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. This statement now brings the VAT treatment into line with what many VAT advisers always thought the position to be, and in line with the policy that HMRC had applied until recently – although in the Brief HMRC state that there has been no policy change.

The rules are that services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction on VAT recovery if a business is partly exempt. For goods purchased within four years of EDR and are still on hand at the time of EDR, VAT may be recovered in full (again subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.

VAT on employer pension fund costs- extension of transitional period

In Revenue and Customs Brief 14(2016) HMRC announced that they have extended for a further 12 months, until 31 December 2017, the transitional period during which a pension fund and employer may continue to apply previous HMRC policy on VAT recovery. This allowed VAT to be recovered based on a 70/30 split between asset management and administration costs in relation to fund management services provided for defined benefit pension schemes.

HMRC announced a change in its policy in February 2014, following the judgment in PPG Holdings, accepting broadly that employers may deduct input tax in relation to both scheme administration and investment management where the employer is a party to the contract for those services and has paid for them. HMRC reports that it is taking longer than expected to reconcile the ECJ’s decision in the PPG case with pension and financial services regulations, accounting rules, and emerging case law, as a result of which it has been decided to extend the transitional period.