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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

Blog

Contractors still on uncertain ground as IR35 rumbles on

This blog was previously published on LinkedIn on 12th June 2018.

If you work as a contractor, or employ them, the ongoing uncertainty around the relevant tax rules may be confusing. The government has now published a consultation paper looking at the application of the off-payroll working rules (also known as IR35) in the private sector.

The aim of the latest consultation is to tackle non-compliance, as the government estimate only 10% of people are applying the rules correctly. It will also look at whether rules applied to the public sector in 2017 should be extended to the private sector.

Under the public sector rules, the public sector body makes the decision of whether a contractor should be classified under IR35 and takes responsibility for deducting tax. Various criticisms have been levelled at this arrangement, including causing delays in projects, failing to raise any extra tax, or driving contractor costs up. However, the government has responded to these issues, saying they are not reflected by the evidence.

The consultation will not look at the underlying principles for off-payroll working, which means the employment status test to determine if a worker should be taxed as an employee or not is not being reviewed.

Meanwhile, a ruling made in January 2017, but which has only now come to light, has cast further doubt on HMRC’s online employment status tool (CEST). The ruling went in the contractor’s favour over a £68,000 tax bill. More importantly, the judge refused HMRC’s position on mutuality of obligation (MOO). Despite HMRC’s insistence on the importance of MOO as one of the three essential tests for IR35, it is not included in CEST.

This could cause problems as HMRC promises to stand by any decision made by CEST, and the tool was used over 575,000 times between March and October 2017. Public sector bodies have also ignored results from CEST and charged tax and national insurance contributions to contractors incorrectly.

The consultation is open until 10 August 2018, and you can read the complete documents, and submit your own response, here - https://www.gov.uk/government/consultations/off-payroll-working-in-the-private-sector

If you are, or soon will be, working off-payroll, we can help with your assessment.

VAT reverse charge for construction services

What is happening?

HMRC has launched a consultation on the proposed draft VAT legislation to implement a reverse charge for certain supplies within the construction industry.  HMRC’s view is that this will substantially reduce fraud and result in additional VAT for the treasury of around £100M per year.   

It is clear that the government is pressing ahead with this change, due to come into force on 1st October 2019, as this is merely a technical consultation to review the proposed scope and definitions (the decision was made at the end of 2017 to implement the reverse charge).  HMRC recognise businesses will need time to adapt and therefore there is a long lead-in time, as well as a ‘soft-landing’ approach to penalties after implementation.

 

What is the Reverse Charge?

Many businesses will be familiar with the reverse charge if they have been involved in providing or receiving services to/from overseas clients.  Although the reverse charge is also a VAT simplification, it is an effective fraud prevention measure.  It was introduced initially to the supply of mobile phones and computer chips, and more recently, has been applied to transactions in other sectors including wholesale gas & electricity and wholesale telecommunications.  That being said, with around 300,000 businesses operating in the construction sector, this is certainly a far more wide-reaching VAT change.

The principle of the reverse charge is a relatively simple one.  Rather than the supplier charging VAT to their customer in the normal way, no VAT is charged and instead, the supplier informs the customer to account for VAT using the reverse charge.  This is a ‘tax-shift’ whereby the customer shows the supply on their VAT return as both a sale and a purchase – with the result often being a ‘paper exercise’ (subject to the usual VAT recovery rules).  The introduction of the reverse charge does not affect the actual VAT liability of the supply being made.

 

What do I need to consider?

Firstly, businesses should determine if the reverse charge will apply by considering both their position in the supply chain and the type of services being provided (zero-rated services are excluded).  Typical businesses affected will include those providing construction services as a sub-contractor to a contractor providing onward construction services.  However, supplies made to consumers or the final business using the services provided, are excluded.   

Businesses should also review their accounting systems and invoicing procedures.  Cashflow management should be considered as some businesses use VAT received from customers as part of working capital. There is also a potential negative impact for suppliers that use the Flat Rate Scheme.

 

What next?

The consultation on the draft legislation runs until 20 July 2018.  HMRC plan to publish a final version of the legislation, as well as new guidance, by October 2018. 

More information on the consultation and draft legislation (including making a submission to HMRC) can be found by using the following link – https://www.gov.uk/government/consultations/draft-legislation-vat-reverse-charge-for-construction-services

If you have any queries or concerns about the Reverse Charge please get in touch with our VAT team by contacting Maria McConnell (VAT Director) at m.mcconnell@frenchduncan.co.uk or William Wallace (VAT Manager) at w.wallace@frenchduncan.co.uk or call 0141 221 2984.

 

Disentangling Savings Tax?

The way savings are taxed is being reviewed by the Office of Tax Simplification (OTS) – but don’t hold your breath yet.

The OTS is looking at the way in which savings and investment income is taxed, which can be very complicated. According to its paper, published in May 2018, the complex marginal rules mean that a lot of people are concerned about how their savings income may be taxed, even if they have no further tax liabilities, with the various specific complexities of the rules being a major issue. The paper also notes that even HMRC’s self-assessment software has sometimes made mistakes dealing with the complications.

To make matters worse, the OTS also found that 95% of people do pay not tax on savings income, thanks to a combination of the personal savings allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers) and the dividend allowance (£2,000).

The OTS paper makes a range of recommendations, including:

  • Changing the personal savings allowance and dividend allowance into genuine allowances. They are currently misunderstood nil tax rate bands.
  • Increasing the flexibility of ISAs by removing some of the rules about in-year subscriptions and transfers.
  • Reviewing the early withdrawal penalty on Lifetime ISAs which have experienced “slower than predicted” uptake.
  • Reviewing the use of emergency tax codes for lump sum pension withdrawals. The system generally results in an overpayment of tax and the need for a subsequent reclaim. Around £37 million of overpayments have been returned to date.
  • Ending the differential tax rates for dividends (7.5% at basic rate, 32.5% at higher rate and 38.1% at additional rate), to bring them in line with other tax rates on savings. 

We can expect to hear more, probably including the announcement of a formal Treasury consultation document, in the Autumn Budget. In anticipation of this, the OTS has already made the plea that, “it is important not to make piecemeal changes, which risk adding further layers of complexity”.

In the meantime, if the tax treatment of your own savings and investments is concerning you, do talk to us. Remember, even HMRC struggle to get it right.

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