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HMRC to run IR35 workshops for construction

HMRC has confirmed it will be running a series of interactive workshops for construction firms this month to help the sector prepare for the impending changes to the IR35 tax rules.

These govern the tax status of an individual working as a contractor or freelancer and whether, for taxation purposes, they ought to be deemed an employee on payroll.

HMRC is running four workshops later this month lasting 90 minutes each

Originally set to come into effect from April 2020, the implementation of IR35 legislation changes was postponed until 6 April this year because of the coronavirus pandemic.

The changes mean that medium and large businesses in the UK will be responsible for determining whether IR35 rules apply to those working for them as contractors, whereas previously the individual contractor was responsible for making this decision.

Now HMRC has confirmed it will be running a series of interactive workshops specifically for medium and large-sized businesses in the construction sector who may be affected by the changes to help them with their preparations.

These are taking place on 19, 20, 26 and 27 January and will run for up to an hour and a half.

The workshops have been designed to provide additional support and as a forum for firms to ask questions.

HMRC has said the companies joining the sessions should also use HMRC’s other resources and already have some knowledge of the forthcoming changes.

Domestic Reverse Charge: The final countdown for builders

Which builders will be affected by the new VAT domestic reverse charge (DRC) regime in the construction industry, which is due to come into effect on 1 March.

On 5 January a government spokesperson confirmed: “The government is committed to implementing the reverse charge on 1 March.” The previous start dates of 1 October 2019 and the 1 October in 2020 were rightly postponed by HMRC for various reasons. The countdown to 1 March 2021 has started.

Reverse charge

The reverse charge rules often cause confusion. In brief the customer accounts for output tax in box 1 of their VAT return, based on a VAT exclusive invoice received from a supplier. If the supplier does not charge VAT in the first place, and is not therefore paid VAT, he cannot pocket the VAT money and disappear without paying it to HMRC.

That is the intended outcome of the DRC regime: to reduce VAT fraud in the construction industry.

Builders selling services

In the case of builders supplying services, there are five key questions to ask. If the answer to the first four questions is ‘yes’ and ‘no’ to the final question, the reverse charge will apply and no VAT will be charged on sales invoices raised for the job in question, and the customer should account for VAT instead.

  1. Is the customer registered for the Construction Industry Scheme (CIS)?

If the answer to this question is ‘no’ the builder doesn’t need to worry about the reverse charge rules any further for this customer and can just adopt normal VAT accounting from 1 March – job done!

  1. Is the customer registered for VAT?

This can be confirmed using HMRC’s new VAT number checker service. It’s recommended it is used by builders as a matter of course.

The worst-case scenario is for a builder not to charge VAT on a job that should have been subject to normal VAT rules, and HMRC raises an assessment for underpaid output tax.

  1. Is the work within the scope of the CIS?

Traditional building services are obviously all included under the CIS, such as electricians, plumbers, bricklayers, decorators, carpenters etc. If in doubt, refer to the useful HMRC guidance on the CIS.

  1. Is the work subject to either 5% or 20% VAT?

Any zero-rated sales are excluded from the new DRC regime, eg construction work on new dwellings.

  1. Is the customer an end user or intermediary supplier for the work?

The DRC only applies if the customer makes an onward supply of construction services to their own customer: ie the typical subcontractor, contractor and customer arrangement. In cases where the contractor is not supplying on the construction services, the work is excluded from the reverse charge. This can happen where:

The customer is an ‘end user’

This would be relevant if, for example, a bricklayer carried out work at the head office of his builder customer, or perhaps at a property that the customer owns and rents out. In other words, the service is not supplied on by the builder receiving the bricklayer’s services. The onus is on the customer to tell the bricklayer if it is an ‘end user’ for any job. If so, VAT will be charge in the normal way by the bricklayer.

The customer is an ‘intermediary supplier’

This is a business that is registered for both CIS and VAT that is connected or linked to end users. The connection is based on s1161, Companies Act 2006 (ie, the two entities are in the same corporate group or undertaking).

A link exists if both the intermediary supplier and the end user have a relevant interest in the same land where the work is taking place (eg, a landlord and tenant arrangement). So, even though the intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders, such as my imaginary bricklayer, will be subject to normal VAT rules rather than the reverse charge.

Sunak unveils lockdown grants worth up to £9,000

Chancellor Rishi Sunak has announced a one-off grant worth up to £9,000 for businesses in retail, hospitality and leisure as part of a £4.6bn support package to help business through the latest national lockdown.

Sunak unveiled fresh support for struggling UK sectors hit hardest by the Covid restrictions that will have to close due to the new national lockdown.

Businesses in retail, hospitality and leisure will be able to receive one-off grants up to £9,000 per business premises.

The announcement comes after the prime minister imposed tough new lockdown measures which are likely to last until at least February half term.

The one-off grant will be open to businesses in hospitality, retail and leisure forced to close their doors and the amount will be judged on the rateable value of the premises.

  • £4,000 for businesses with a rateable value of £15,000 or under
  • £6,000 for businesses with a rateable value between £15,000 and £51,000
  • £9,000 for businesses with a rateable value of over £51,000

In addition, Sunak also rolled out a further £594m for local authorities and devolved administrations. These funds will support businesses not eligible for the one-off grant and those interested are encouraged to apply to their local authorities.

Sunak recognised that the new strain of the virus presents a “huge challenge” and requires “swift action”, which is why they’re announcing “a further cash injection to support businesses and jobs until Spring”.

“This will help businesses to get through the months ahead – and crucially it will help sustain jobs, so workers can be ready to return when they are able to reopen.”

Additional support

The £4.6bn cash injection comes in addition to the already existing grants worth up to £3,000, the extension to the furlough scheme until April and the business lending schemes.

The last line of the government press release also highlighted an extension of the Self Employment Income Support Scheme, but no further details were given on that nor any support for those that don’t qualify for SEISS.

Devolved administrations will have their own pot to deliver grants and support, with Scotland receiving £275m and the Welsh government getting £227m.

This package of support will tide businesses over until 3 March when Sunak will “take stock of our wider support, and set out the next stage in our economic response”.

“The next few weeks are going to be difficult but we are vaccinating more and more people every day. So that’s why we are re-doubling our efforts to protect businesses, jobs and incomes,” said Sunak.

Chancellor Rishi Sunak reveals date of next Budget

The next Budget will be held on 3 March 2021, Chancellor Rishi Sunak has announced.

He said it would “set out the next phase of the plan to tackle the virus and protect jobs”.

A budget had been expected to take place in Autumn, but this was scrapped due to the coronavirus pandemic.

Mr Sunak also announced that the furlough scheme, which subsidises the wages of workers hit by the virus, will be extended from March to April 2021.

Governments usually use the Budget to outline the state of the country’s finances and propose tax changes.

This will be Mr Sunak’s second budget since he became chancellor.

The budget will come at a difficult time for the UK economy as it faces the fallout from the pandemic.

Official forecasts have predicted the biggest economic decline in 300 years with the UK’s national income expected to shrink by 11.3% in 2020 and not return to pre-crisis levels until the end of 2022.

Government borrowing will also rise to its highest level outside of wartime – and unemployment is predicted to increase to 2.6 million, according to the Office for Budget Responsibility.

Speaking in Parliament earlier this year, Mr Sunak warned that “our economic emergency has only just begun.”

He said that, although the high levels of borrowing were justified in order to deal with the virus, “the situation is clearly unsustainable over the medium term.”

The Institute for Fiscal Studies think tank has warned that tax rises of more than £40bn a year are “all but inevitable” to stop debt from spinning out of control.

Rishi Sunak extends furlough & business loan schemes

Chancellor Rishi Sunak has extended the furlough scheme for one month until the end of April next year.

He said the move would provide “certainty for millions of jobs and businesses”.

It means the government will continue to pay 80% of the wages of workers who have been furloughed.

Mr Sunak also confirmed he would be extending the government-guaranteed Covid-19 business loan schemes until the end of March.

These changes come in the run-up to the next Budget, which the chancellor confirmed would take place on 3 March 2021.

“Our package of support for businesses and workers continues to be one of the most generous and effective in the world – helping our economy to recover and protecting livelihoods across the country,” Mr Sunak said.

“We know the premium businesses place on certainty, so it is right that we enable them to plan ahead regardless of the path the virus takes, which is why we’re providing certainty and clarity by extending this support.”

Criteria unchanged

The government will continue to pay 80% of the salary of employees for hours not worked until the end of April.

Employers will only be required to pay the wages, National Insurance (NI) contributions and pensions for hours worked, as well as NI contributions and pensions for hours not worked.

The eligibility criteria for the UK-wide scheme will remain unchanged and these changes will continue to apply to all devolved administrations, the government said.

Businesses will also have until the end of March to access the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme, and the Coronavirus Large Business Interruption Loan Scheme.

These had been due to close at the end of January.

Economic cost of Covid crisis prompts call for one-off UK wealth tax

The government has been urged to launch a one-off wealth tax on millionaire households to raise up to £260bn in response to the coronavirus pandemic, as the crisis damages Britain’s public finances and exacerbates inequality.

The Wealth Tax Commission – a group of leading tax experts and economists brought together by the London School of Economics and Warwick University to examine the case for a levy on assets – said targeting the richest in society would be the fairest and most efficient way to raise taxes in response to the pandemic.

In a highly anticipated report, the group, which has drawn attention from the Commons Treasury committee and the former head of the civil service, Sir Gus O’Donnell, said its proposals would be preferable to a broad-based tax raid on workers’ incomes and consumer spending.

It said a wealth tax could raise £260bn over five years if the threshold was set at £1m per household, with a levy of 1% payable on the value of their assets above this level. This would be equivalent to raising VAT payable on goods and services by 6p, or by adding 9p to the basic rate of income tax for the same period, the commission said.

The tax would apply to a person’s total wealth – including their home and any other properties, pension pots, business and financial wealth. Any debts, such as mortgages, would be deducted. At thresholds of £500,000, £1m and £2m per person, a wealth tax would respectively cover 17%, 6%, and 1% of the adult population.

To sidestep concerns that a new wealth tax could hurt people who are ‘“asset rich but cash poor” who could be forced to sell their home to pay the tax bill, the Commission said the one-off levy could be spread out over five years and people could be offered more time to pay.

Arun Advani, assistant professor at the University of Warwick, who is one of three commissioners behind the study, said: “We’re often told that the only way to raise serious tax revenue is from income tax, national insurance contributions, or VAT. This simply isn’t the case, so it is a political choice where to get the money from, if and when there are tax rises.”

The UK government’s budget deficit – the gap between spending and tax income – is on track to hit almost £400bn this year, as the state pumps billions of pounds into its pandemic response and tax receipts plunge amid the Covid recession.

Although the chancellor has been urged to delay tax rises or spending cuts until the economy is on a sustainable path to recovery, he used last month’s spending review to freeze public sector pay and cut the overseas aid budget. Sunak has also warned that “hard choices” on tax and spending will be required in future.

Calls for a wealth tax have been made before with little impact, amid fears that a levy on assets would go down badly with some voters and could hurt people with valuable homes but low incomes. Sunak has previously dismissed calls for a wealth tax, saying he believed there would never be an appropriate time for such a plan.

It said that one-off taxes have been used after major crises before, including in France, Germany and Japan after the second world war and in Ireland after the 2008 financial crisis.

Rebecca Gowland, the head of inequality campaigning at Oxfam, said: “At a time when so many people are facing hardship as a result of the pandemic, this feasible and deliverable one-off wealth tax could transform lives – an uncomfortable truth for vested interests that are likely to resist it.

“The difference this revenue could make for the most vulnerable in society is staggering. Just a quarter of the extra money raised would be enough to keep and extend the social security weekly uplift and allow us to meet our lifesaving aid promise to the world’s poorest people.”

New SEISS conditions may trip up taxpayers

The SEISS claims portal reopens on Monday 30 November, but taxpayers must declare their trade has been impacted by reduced demand before they claim the third grant.

When claiming the first two self-employed income support (SEISS) grants taxpayers had to confirm that their trade had been adversely affected by the coronavirus pandemic, which was a difficult concept to pin down. For the SEISS.3 this condition has been replaced with a more precise “impact on demand” test.

Where they qualify for the SEISS.3 grant the taxpayer will receive one lump sum payment to cover the three-month period: 1 November 2020 to 31 January 2021. It will be paid at 80% of the taxpayer’s average trading profits for 2016/17 to 2018/19, as calculated for the SEISS.1 grant.

The maximum SEISS.3 grant payable is £7,500, or £2,500 per month, which is also the same cap as applied for the SEISS.1 grant.

Declarations

The HMRC guidance on checking whether the taxpayer can claim the SEISS.3 grant confirms the individual must be:

  • currently trading and be “impacted by reduced demand”; or
  • has been trading but the business is temporarily closed due to coronavirus.

The trader must also confirm they are:

  • intending to continue to trade; and
  • they reasonably believe that the impact on their business will cause a significant reduction in their trading profits due to reduced business activity, capacity or demand, or inability to trade due to coronavirus during the period 1 November 2020 to 31 January 2021.

Emphasis on sales not costs

The previous “adversely affected” test was met if the business turnover had decreased, or alternatively if business costs had increased, due to the pandemic. There was no minimum threshold for the adverse effect, so even a small increase in costs or drop in sales meant the business would qualify.

The reduced demand test is set out in a new HMRC Direction for SEISS.3 at para 4.2. It requires the trader to suffer a significant reduction in trading profits for the relevant basis period (see below). “Significant” is not defined, so it must take its normal English definition as having a great effect, or something that affected a situation to a noticeable degree.

The HMRC examples make it clear that an increase in costs alone, resulting in a drop in profits, will not allow the trader to qualify for the grant.

The reduction in sales can be due to a number of factors, but it must also lead to a reduction in profits. If the volume of sales has decreased but the value of each sale has increased so profits are constant, the business does not qualify.

However, if the reduced sales activity is solely due to the business owner having to self-isolate because they, or someone they care for, has travelled into the UK, that business doesn’t qualify for the SEISS.3 grant. Self-isolation due to Covid-19 symptoms, testing or on instruction due to medical vulnerability is accepted as a cause of reduced sales.

Relevant basis period

The new HMRC Direction (legislation for SEISS.3) makes it clear that the significant reduction in trading profits must be measured over the current accounting period as a whole, and that is the period that includes November 2020 to January 2021.

Where the accounting period ends on 31 March or 5 April 2021, it will align to the 2020/21 tax year and be reported on the 2020/21 tax return submitted by 31 January 2022. But many sole traders work to different year end, such as 30 April 2021. This “current period” will be taxed in 2021/22, and reported on the SA return submitted by 31 January 2023.

Other conditions

The other conditions for the SEISS.3 grant are the same conditions as applied for the first two SEISS grants.

The taxpayers who were excluded from those grants are still excluded from the SEISS.3, and this will include those who:

  • started their business after 5 April 2019,
  • submitted their 2018/19 tax return after 23 April 2020
  • had self-employed profits of less than half their average annual income
  • had average annual profits for 2016/17 to 2018/19 in excess of £50,000.

How accountants can help

The SEISS grant must be claimed by the individual taxpayer, online through the HMRC portal, by 29 January 2021. Tax agents should not attempt to make the SEISS claim by using their client’s Government Gateway ID and password, as this will trigger a fraud flag.

However, before claiming the taxpayer made need help in forecasting their turnover for the full accounting period that includes the period November 2020 to January 2021.

HMRC starts ‘eat out to help out’ compliance checks

HMRC is writing to 4,000 businesses who took part in the government’s eat out to help out (EOTHO) scheme for half price meals in bars and restaurants, asking them to verify their claims.

According to Treasury figures, more than 84,700 food and drink establishments took part in the scheme and offered a 50% discount on eligible purchases on Mondays, Tuesdays and Wednesdays during August.

At the end of that month, there were 130,000 claims recorded, with the cost to the Treasury put at £522m.

At the time, HMRC said it had worked quickly to set up a system to pay restaurants within five working days. Controls were built into to address potential fraud, which included limiting eligibility to food businesses registered with the relevant local authority by 7 July.

Now HMRC says it is starting on a round of post-payment compliance checks to recover money paid out incorrectly.

It is writing to around 4,000 businesses where HMRC records suggest that they may have made an incorrect claim and asking them to check their claims are correct.

Claimants have 60 days to respond to the letter or HMRC may start a formal compliance check. This could include having to pay statutory interest and penalties.

The letter tells recipients they have been selected for consideration because they may have claimed for more EOTHO payments than they were entitled to, based on the information HMRC holds about the business, the amounts claimed and the data about the payments have received by credit and debit card.

In other instances, businesses may have made one or more EOTHO claims which do not appear to be consistent with other EOTHO claims they made, or may not have met the conditions to claim or receive EOTHO payments.

Some claimants may be asked to provide evidence of eligibility and their EOTHO calculations.

Anyone who voluntarily repays any overpaid EOTHO payments, will not be charged a penalty for the error.

Those who have made incorrect claims will need to complete an online disclosure form, and HMRC will calculate the amount owed.

Businesses who believe their EOTHO claims were correct and they met the conditions to receive them, still need to contact HMRC.

If a business does not make a disclosure or contact HMRC, they may face a formal compliance check.

The letter concludes: ‘We are supporting our customers while tackling serious fraud and criminal attacks. We understand mistakes happen, particularly in these challenging times. This means we will not look for innocent errors and small mistakes for compliance action.’

Earlier this month HMRC announced three men had been arrested at addresses in London on suspicion of cheating the public revenue and fraud by false representation, with the allegations linked to the EOTHO scheme.

CJRS

Separately, companies which are continuing to make claims for furloughed staff under the coronavirus job retention scheme (CJRS) which has now been extended to 31 March 2021 are being warned they need to ensure their record keeping is in order or face possible investigation.

Fiona Fernie, a tax dispute resolution partner with Blick Rothenberg, said: ‘HMRC are investigating widespread fraud and are looking into thousands of claims that were made under the scheme and unfortunately businesses that did not keep proper records are the ones that are being scrutinised the most.

‘Within days of the first “amnesty” deadline passing for repayment of amounts overclaimed under the CJRS, HMRC have already swung into action investigating claims where they believe that employers have claimed the wrong amount or were ineligible to claim.’

The deadline for making the repayments was 20 October in respect of claims received prior to 22 July and for claims received after that date the deadlines for making repayments of amounts incorrectly claimed are 90 days after receipt of the funds.

Fernie said: ‘It is therefore vital that employers continue to check historical CJRS claims to ensure both the numerical accuracy of the claims and that they were justified in making them since the more of these deadlines are missed the greater the likelihood of HMRC imposing significant penalties.’

Tackling Construction Industry Scheme abuse

The Government announced at Spring Budget 2020 a consultation to tackle abuse of the Construction Industry Scheme (CIS). A consultation document was published 19 March 2020 setting out proposals.

HMRC has published a Summary of Responses and the draft legislation which will tackle false claims being made to HMRC. The legislation, and supporting regulations, will give HMRC the power to amend the effect of certain CIS deduction claims on employer returns. Other legislative changes include modifications to the current rules on the cost of materials, deemed contractors and an expansion to the scope of the CIS false registration penalty.

The Government will continue to consider any future supply chain measures in light of the information received from this consultation, as well as other changes to the CIS scheme to protect against fraud and abuse.

The measure is published on GOV.UK alongside details of the draft legislation, and the Summary of Responses. The Government welcomes comments on the draft legislation by 7 January 2021. If you would like to provide a response, please email cisconsultations@hmrc.gov.uk.

The changes to the CIS will be legislated in Finance Bill 2021 and apply from April 2021.

CJRS extension: Get the details right

The policy paper that accompanied Chancellor Rishi Sunak’s announcement on 5 November provides us with a little more information, but it promises that more guidance will be produced. A further announcement will detail whether the full 80% employer funding will continue from January to the end of the scheme.

Weekly payrolls

The first weekly payrolls for November have already been run, when there was no indication of what reference pay or usual hours calculation was to be used for employees who had not been furloughed previously. Hopefully the new guidance will allow corrections to be made next week and before the vast majority of monthly payrolls are run.

Pay reference periods

For employees eligible for the previous iterations of the CJRS, the reference pay remains as the calculation for CJRS.2 that ended on 31 October. This is the case even if the employer did not make a claim for the employee.

Other employees may be now eligible for CJRS.3 as they either:

  • had earnings for 2019/20 reported on a full payment submission (FPS) from 20 March 2020 to 19 April 2020 (19 April being the deadline for 2019/20 submissions); or
  • had earnings for 2020/21 reported on a full payment submission from 6 April 2020 to 30 October 2020

The pay reference period will be:

  • for fixed-rate employees the last pay period on or before 30 October 2020.
  • for variable pay employees the average over the period from 6 April 2020 to last pay period on, or before, the day before they were furloughed under CJRS.3.

Note: Fixed-rate employees can be treated as variable if they have lots of fluctuating additional pay such as overtime.

Is it fair?

The calculation of reference pay appears more generous for variable-paid than for fixed-rate employees. Any pay rises from 1 November to start of furlough will be ignored for fixed rate employees, but pay will be included in the average for variable pay employees over (potentially) a much longer period if the business doesn’t need to furlough immediately under CJRS.3.

Conversely there doesn’t appear to be the option to use the pay period before the start of furlough if that was higher than the average for a variable pay employee.

There is also a strange outcome where an employee began work in October, as a fixed rate employee on say national minimum wage; they would be furloughed on £8.72 per hour, whereas a colleague employed since February 2020 would only be furloughed based on £8.21 per hour.

Owner managed businesses

Directors who reported their annual payment for 2019/20 to HMRC after 19 March 2020 will now be included in CJRS.3 having been excluded up until 31 October. The rate of earnings reported in the period from 20 March to 30 October 2020 can be claimed, subject to the £2,500 monthly pay cap. Remember this £2,500 cap is pro-rated to the number of furloughed hours as a proportion of usual hours.

With the ability to flexi-furlough being in place from 1 November 2020 this will be more attractive to such directors, but we still face the conundrum of trying to be able to evidence usual hours to support the claim.

Usual hours

For previously eligible employees the usual hours remain as per the calculation for CJRS.2 that ended on 31 October. This is the case even if the employer did not make a claim for the employee.

For newly eligible employees, usual hours will be:

  • for fixed rate employees the contracted hours worked in the last pay period ending on or before 30 October 2020.
  • for variable pay employees the average hours worked between 6 April 2020 and the day before they were furloughed under CJRS.3

The usual hours are based on calendar days in the claim period.

Claim deadline

One of the most concerning differences from the CJRS.2 is the fact that claims for the prior month have to be made by the 14th day of the following month. Thus, claims up to 30 November have to be claimed by 14 December.

This will put an enormous burden on employers and agents and may prove impossible where payments for the month of November are paid in arrears in December with timesheets having to be collated. We will have to see whether an estimated claim is worth making by the deadline, and whether HMRC will allow corrections after 14th of each month.

Claims will be able to be made in advance (it’s assumed as now 14 days before payday) and will pay out within six days. The new claim portal will open at 8am on 11 November.

Employers are not required to submit their RTI returns before making a claim, so we appear to have returned to the ‘pay now check later’ model. There is also no mention in the policy paper of informing employees that their employer has claimed on their behalf as had been the intention with the JSS, but employers using the scheme will be named.

Rehires

Individuals who had a date of leaving reported after the 23 September 2020 can be reinstated if the employer so chooses.

Contract changes

The government has recognised that it has been impossible to put in place furlough agreements from 1 November, given that employers were not aware what the reference pay period would be. Contract changes can be backdated to 1 November 2020 but must be issued by 13 November 2020, but as the new guidance is promised on 10 November this could be challenging.

Claim periods will cover a minimum of seven days and I assume orphan periods will be a feature of the new scheme, where a week split is over two calendar months, meaning there will be less than seven days in the claims. This should be okay as long as it’s preceded or followed by a seven day period of furlough.

Schemes scrapped

The job support scheme will not be coming into effect this tax year and the job retention bonus has been scrapped.

What hasn’t changed from CJRS.1 and CJRS.2?

  • All employment rights continue during furlough, eg accrual of holiday pay and leave.
  • Employees can be included in a CJRS claim when they are off sick, and must be paid at least the level of SSP. Employers can choose to either pay SSP only or furlough pay, and clearly the latter is more beneficial to the employee and employer.
  • Employers can top up furlough pay but aren’t obliged to.
  • Employers will still be liable for employer’s NIC and pension contributions for any unworked hours
  • Employees can train, volunteer, or work for another employer whilst furloughed.