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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

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.

Non-Conforming Uniforms…

A number of well-known brands have been marred in the media in recent months for failing to pay the correct minimum wage.  We have seen 179 employers being ‘named and shamed’ by the government, in particular within the hospitality industry, including Wagamama, TGI Fridays and the Marriott hotel group.  

However, before we start branding these high profile companies as rogue employers, the reason for their failure to pay the correct rates has been a misunderstanding of the rules around staff paying for or providing their own uniforms.   In short, these employers (and likely a raft more in the hospitality and other sectors) have been working under the incorrect assumption that either charging staff for uniforms or requiring them to provide their own uniforms does not impact on the National Minimum Wage.  This is sadly not the case, and collectively these non-conforming employers will have to repay £1.1 million to the 10,000 affected workers along with government fines of £1.3 million. 

It is fair to say that the vast majority of the working population would accept it is their responsibility to wear the correct attire for work, whether that be business dress for an office job, protective clothing for working on a construction site or a specified uniform in a hotel, restaurant or shop.  However, the relevant legislation sets out that if an employer requires a worker to purchase specific items or wear a particular colour of clothing, any deductions from wages, payment to a third party or the worker’s own pocket will reduce the national minimum wage pay. 

So, in the example of Wagamama, the company provide branded t-shirts at no cost, but the staff have to wear their own black jeans or skirt – the mere fact of specifying the colour of clothing the staff had to wear took the company below the national minimum wage calculation.  Similarly in the case of TGI Friday’s, staff were provided with a uniform, and had to provide their own black shoes, and again this was considered enough to see them fall short of the minimum rate.   

What is clear from these cases is that where employers require staff to either purchase or provide their own uniform, it is essential that they understand the implications in terms of the national minimum wage.  Going forward, affected employers either need to fund the uniform costs, provide an allowance for the specific items of clothing or increase the hourly rate of affected staff to ensure they do not breach the rules.  

HMRC are clearly clamping down on this area of national minimum wage compliance.  By focussing on some high profile brands in the hospitality sector, it has been made loud and clear to employers paying the minimum wage that the common practices around uniform provision are no longer acceptable.  Aside from the reputational damage and the headache of arranging back pay, the fines are not insignificant with up to a whopping £20,000 per underpaid worker.

So, employers requiring their staff to “dress to impress” will now also now need to be mindful they impress HMRC and avoid non-conforming uniforming! 

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