Reviewing the changes to off-payroll working
Reviewing the changes to off-payroll working as HMRC prepares to extend the initiative to the private sector.
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Next April will see HMRC apply changes to the way off-payroll workers of medium and large organisations in the private sector are taxed. This move is an extension of the changes to off-payroll working rules that were applied to the public sector in 2017. Here, we take a look at the regulations.
The 'Intermediaries Regulations', also known as IR35
The Intermediaries Regulations, also known as IR35, apply to individuals who provide their personal services via an 'intermediary'. An intermediary may be another individual, a partnership, an unincorporated association or a company; however, the most common structure is a worker providing their services via their own company – known as 'personal service companies' (PSCs).
The rules are specifically designed to prevent the avoidance of tax and national insurance contributions (NICs) by those using PSCs and partnerships. The rules do not stop individuals selling their services through either their own PSC or a partnership. However, they do seek to remove any possible tax advantages from doing so. Instead of allowing contractors to extract taxable profits as dividends, thereby avoiding income tax and NICs, they would need to be paid as if the payment is a salary.
Introduction to public sector contractors
In 2017, HMRC took aim at 20,000 public sector contractors with the intention of raising £400 million by requiring some workers to pay income tax and NICs.
Those changes saw some contractors' net income cut significantly. HMRC also shifted the responsibility for compliance from the individual contractor to a public body or recruitment agency. The effect of these rules, if they apply, will be:
- the medium or large business (or an agency paying the PSC) will calculate a 'deemed payment' based on the fees the PSC has charged for the services of the individual
- generally, the entity that pays the PSC for the services must deduct Pay as You Earn (PAYE) and employee NICs as if the deemed payment is a salary paid to an employee
- the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment, but also employer NICs on the deemed payment
- the net amount received by the PSC can be passed on to the individual without the company deducting any further PAYE and NICs.
The IR35 rules apply to individuals who would be classed as employees, rather than self-employed, if they supplied their services as an individual rather than through their PSC. So, an individual operating through a PSC but with only one customer for whom he/she effectively works full-time is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to get caught in the net.
HMRC has made a tool known as the 'check employment status for tax' (CEST) tool. This is available for organisations that need to determine who IR35 applies to.
Extension to the private sector
HMRC intends to extend the off-payroll working changes to private sector contractors in April 2020, but the path to this deadline has proved to be a rocky one.
Following two consultations, the government has finally published draft legislation, which will, subject to further consultation, be included in the next Finance Bill. HMRC has also promised to keep working on the CEST tool, which has been heavily criticised for not being fit for purpose.
Next year's reforms will use the off-payroll working rules in the public sector as a starting point. The onus will be on organisations to make a determination of a worker's employment status and communicate the decision in a Status Determination Statement (SDS). The PSC worker may request for the reasons for the determination, and if they disagree with the decision, the CEST tool can be used to check whether it was correct. However, the efficacy of the CEST tool is being questioned by many who consider that the law on status is too complicated to allow a simple yes/no checklist to provide the right answer in all cases.
The government will introduce a 'client-led status disagreement process' where the worker can make a representation to the medium or large business if they believe that the conclusion mentioned in the SDS is incorrect. The medium or large business has 45 days, from when the representation is received, to review the decision and either confirm the decision or give the worker a new SDS with a different conclusion. If the business confirms the decision, it must give its reasons for deciding that the conclusion is correct.
We are always on hand to answer any questions you may have about off-payroll working – simply contact us for more information.
Gifting and inheritance tax: considering the rules
Considering the rules surrounding gifting and inheritance tax.
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Research published recently by the Institute for Fiscal Studies (IFS) and the National Centre for Social Research (NCSR) suggested that just 45% of individuals seeking to make a financial gift are aware of the inheritance tax (IHT) rules and exemptions. Here, we take a look at these in more detail.
An individual is entitled to give gifts of up to £3,000 per annum without incurring an IHT charge. An unused annual exemption may be carried forward for one year only – this may only be used in the tax year that immediately follows.
Individuals are also able to give as many gifts as they'd like, up to £250 per person, per tax year. Gifts between spouses/civil partners are exempt from IHT, and, on death, a spouse is able to pass on their unused nil-rate band. The nil-rate band currently stands at £325,000.
Gifts to children in consideration of marriage of up to £5,000 are exempt, as long as they are made by parents. Meanwhile, wedding gifts of up to £2,500 given to grandchildren or great-grandchildren are exempt from IHT, and £1,000 is exempt if the wedding gift is given to an alternative relative or friend.
Gifts to registered charities are exempt from IHT, as long as the gift becomes the property of the charity or is held for charitable purposes. Meanwhile, gifts made to political parties are also exempt, under certain conditions.
A gift given in order to assist with family maintenance does not give rise to an IHT charge. Such gifts may be given as a transfer of property upon divorce; gifts given to children aged under 18 or those in full-time education; and gifts towards a dependent's living costs.
IHT and lifetime gifts
There are three categories that 'lifetime gifts' can fall into:
- a transfer made to a company or a trust (excluding a disabled trust) is immediately chargeable
- exempt gifts which are ignored when they are made and on the death of the donor (such as gifts to charity)
- transfers that don't fall into the first two categories are Potentially Exempt Transfers (PETs), and IHT will only be due if the donor dies within seven years of making the gift. The amount of IHT due will be determined on the number of years that have passed since the gift was given and the donor's death.
In regard to PETs, gifts made within three to seven years before a donor's death are taxed using 'taper relief'. Therefore, the IHT rate for three to four years between gifting and death currently stands at 32%; for four to five years it's 24%; for five to six years it's 16%; and between six and seven years it is 8%. No IHT is due on the gift after seven years.
A look at the nil-rate band
The rate of tax on death is 40%, and 20% on lifetime transfers, where chargeable. For 2019/20, the first £325,000 chargeable to IHT is at 0% - this is called the 'nil-rate band'. An additional Residence Nil-Rate Band (RNRB) is available where an interest in a qualifying residence passes to direct descendants. The amount of relief is £150,000 for 2019/20: this is set to rise to £175,000 for 2020/21.
Here, we have provided just a brief outline of some of the issues to consider when giving gifts. There may be scope for additional savings when factoring giving gifts into your estate planning – please get in touch for more information.
Getting to grips with PAYE
Taking a look at the current PAYE scheme.
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The Office of Tax Simplification (OTS) recently called for a comprehensive review of the Pay as You Earn (PAYE) system, to ensure tax agents can 'see relevant client information' and 'access a number of key services'. Here, we take a look at the PAYE system and how it operates.
How does the system work?
PAYE is the system through which employers deduct an amount of income tax, national insurance contributions (NICs) and student loan repayments from employees' wages, in accordance with the relevant PAYE codes and HMRC procedures.
Employers must normally operate PAYE as part of their payroll process: however, if none of the employees are paid £118 or more per week, receive expenses and benefits, have an additional job or receive a pension, employers do not have to register for PAYE. However, they must still keep payroll records.
A look at Real Time Information (RTI)
Employers are required to report using the PAYE system in real time. Under RTI, employers or agents must make regular payroll submissions for each pay period during the year. These must detail payments and deductions made from employees each time they are paid. Employers must make two main returns: a Full Payment Submission (FPS) and an Employer Payment Summary (EPS).
Employers must send the FPS to HMRC on or before the date employees are paid. All employees must be included, even if they earn less than £118 per week.
Certain situations require employers to submit an EPS. These include:
- instances where no employees were paid in the tax month
- instances where an employer received advance funding to account for statutory payments
- cases where statutory payments (such as Shared Parental Pay) are recoverable, alongside a National Insurance Compensation Payment
- cases where Construction Industry Scheme (CIS) deductions are suffered, which could be offset (please note that this applies to companies only).
The amounts recoverable are offset against the amount due from the FPS. This helps to calculate the amount payable. An employer's EPS must be with HMRC by the 19th of the month for it to be offset against the previous tax month's payment. At the end of the year, employers must make a final FPS or EPS return to inform HMRC that all payments and deductions have been reported.
PAYE and new businesses
As soon as a new employer takes on employees, they must contact HMRC. A PAYE scheme must be set up for the business. HMRC provides new employers with guidance, including a variety of forms, and online 'basic PAYE tools'. These help employers to calculate the amount of tax and NICs due.
It is vital that employers understand the requirements: HMRC often carries out compliance visits, and these may occur at any time. Employers will be held liable for any under-deductions HMRC finds.
HMRC issues penalties to employers who fail to meet their PAYE reporting requirements. You could be liable for a penalty if your FPS was late; if you failed to send the correct number of FPSs; or if you failed to send an EPS when you didn't pay any employees in a tax month. Fines range from £100 for firms with one to nine employees, to £400 for businesses with 250 employees or more.
Managing a PAYE scheme can be challenging: that is where we can help. Please contact us for more information.
Making Tax Digital for VAT: answering the key questions
Providing answers to a handful of your key MTD for VAT questions.
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Making Tax Digital for VAT (MTD for VAT) is now live. Firms with a taxable turnover above the VAT registration threshold (currently £85,000) must comply with the new rules. Below, we answer some of your key MTD for VAT questions.
Q: What information needs to be kept digitally?
A: Under MTD for VAT, firms must keep specific records digitally. Additionally, all future VAT returns must be filed directly from digital records via an Application Programming Interface (API).
Submission of the return can be from API-enabled spreadsheets, software or bridging software. Businesses using more than one software program are required to have 'digital links' in place between the products.
Q: Does HMRC provide MTD for VAT software?
A: HMRC does not provide firms with MTD for VAT software. It does, however, list recognised products on the gov.uk site. Businesses are encouraged to contact their software provider to ascertain whether MTD for VAT products are available.
Q: Am I required to sign up to MTD for VAT, or is my business enrolled automatically?
A: Businesses are required to sign up to the MTD for VAT initiative. Business owners will need their firm's Government Gateway user ID and password, alongside its VAT number, to sign up. Once the process has been completed, HMRC will confirm via email that your sign-up has been successful.
Q: Do all businesses have the same start date?
A: Each firm has its own date to start using the MTD for VAT system. Your start date is dependent on your VAT quarters. If your taxable turnover is above £85,000, the MTD for VAT rules are compulsory for your first VAT return period starting on or after 1 April 2019. Those businesses with turnover below the VAT registration threshold are not required to use MTD for VAT. However, they may wish to join the scheme voluntarily.
Some businesses are exempt from MTD for VAT. These include:
- businesses run by practising members of a religious society or order with beliefs incompatible with MTD for VAT requirements
- businesses subject to an insolvency procedure
- those satisfying HMRC that, for reasons of age, disability, remoteness of location or for any other reason, it is not reasonably feasible for them to use digital tools to keep records and submit returns.
A significant deferral of MTD for VAT applies for a small group of taxpayers with 'more complex' requirements. These firms have been given an additional six months to prepare for the initiative.
For more information on which types of business are affected by the deferral, please see below. Firms subject to the deferral adopt MTD for VAT rules for their first VAT return period starting on or after 1 October 2019.
Q: Which firms are affected by the deferral?
A: The deferral applies to not-for-profit organisations not set up as a company; trusts; VAT divisions; VAT groups; local authorities; public corporations; and traders based overseas. Public sector entities required to provide additional information on their VAT return, those who must make payments on account, and annual accounting scheme users are also covered by the deferral.
Q: If my turnover falls, can my business leave MTD for VAT?
A: The MTD for VAT regulations specify that, once a business is in MTD for VAT because its taxable turnover exceeds the VAT registration threshold, it must remain in the scheme, even if turnover subsequently falls below the threshold.
MTD for VAT rules only cease to apply if a business qualifies for exemption, or if it deregisters from VAT.
Q: Do penalties apply for incorrect filing under MTD for VAT?
A: For the first year, HMRC intends to take a more lenient approach to issuing MTD for VAT penalties. HMRC has termed this the 'soft-landing' period. For VAT return periods beginning between 1 April 2019 and 31 March 2020, penalties won't be charged if businesses don't have digital links between software programs in place. Cut-and-paste will continue to be an acceptable way to transfer data to HMRC. The soft-landing period has been adapted for those businesses affected by the deferral, permitting them 12 months to put digital links into place.
However, where information is transferred from the accounting records into a separate program for submission to HMRC via the API, transfer must be digital.
In addition, the VAT default surcharge regime will operate until 'at least' 2021. From this time, HMRC intends to implement a new penalty 'points' scheme for late submission of VAT returns and late VAT payments.
Ensuring you are compliant with the MTD for VAT rules is crucial. We are always on hand to answer any questions you may have - simply contact us for more information.
Taking a look at the measures coming into effect in 2019/20
Reviewing the changes to tax and business legislation taking effect from April 2019.
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The beginning of the 2019/20 tax year ushers in a handful of changes to tax and business legislation. Here, we outline some of the key measures to take note of.
Rising minimum wage
From 1 April 2019, the National Minimum Wage (NMW) and the National Living Wage (NLW) rates will rise.
The new hourly rates of pay applying from this date are as follows:
|Age||National Minimum Wage||National Living Wage|
|16 and 17||£4.35||-|
|18 - 20||£6.15||-|
|21 - 24||£7.70||-|
|25 and over||-||£8.21|
*Under 19, or 19 and over in the first year of their apprenticeship.
Additionally, in the 2019 Spring Statement, Chancellor Philip Hammond announced that Professor Arindrajit Dube will undertake a review of the latest international evidence on the impact of minimum wages, to inform future NLW policy after 2020.
Alterations to income tax
In 2019/20, the income tax basic rate band will rise to £37,500. Consequently, the threshold at which the 40% band applies is £50,000 for taxpayers who are entitled to the full personal allowance (PA). Individuals pay tax at 45% on their income over £150,000.
From April 2019, the PA will rise from £11,850 to £12,500. Where an individual's 'adjusted net income' exceeds £125,000 in 2019/20, no PA is available.
The tax on income for taxpayers resident in Scotland is different to income tax paid elsewhere in the UK. In 2019/20, there are five income tax rates, which range between 19% and 46%. The two higher rates are 41% and 46%, as opposed to the 40% and 45% rates that apply to such income for other UK residents. For 2019/20, the threshold at which the 41% band applies is £43,430 for those who are entitled to the full PA.
Meanwhile, from April 2019, the Welsh government has the power to vary the rates of income tax payable by Welsh taxpayers. The Welsh rate of income tax has been set at 10p by the Welsh government: this will be added to the reduced rates. As a result, the tax payable by Welsh taxpayers continues to be the same as that payable by English and Northern Irish taxpayers.
Changes to employer-provided cars
The scale of charges for working out the taxable benefit for an employee who has use of an employer-provided car is normally announced well in advance. Most cars are taxed by reference to bands of CO2 emissions, multiplied by the original list price of the vehicle. The maximum charge is capped at 37% of the list price of the car.
For 2018/19 there was generally a 2% increase in the percentage applied by each band. For 2019/20 the rates will increase by a further 3%.
Rising Residence Nil-Rate Band
The inheritance tax Residence Nil-Rate Band (RNRB), which was introduced in April 2017, will rise from £125,000 in 2018/19 to £150,000 for the 2019/20 tax year. The RNRB is designed to enable a 'family home' to be passed wholly or partially tax-free on death to direct descendants, such as children or grandchildren. It will increase to £175,000 in 2020/21. Thereafter it will rise in line with the Consumer Price Index.
Increase in compulsory employer pension contributions
As part of the pensions auto-enrolment scheme, employers are currently required to contribute at least 2% on the qualifying pensionable earnings for eligible jobholders. From 6 April 2019, this figure will increase to 3%.
Alterations to the Gift Aid Small Donations Scheme
Where small charitable donations are made, and it is impractical to obtain a Gift Aid declaration, individuals may choose to make use of the Gift Aid Small Donations Scheme (GASDS). The scheme currently applies to donations of £20 or less made by individuals in cash or contactless payments. From 6 April 2019, this limit will rise to £30.
As your accountants, we can advise you on how the measures taking effect from April 2019 could affect your business or personal finances. Please get in touch with us for more information.
Considering the rise in popularity of flexible working
Taking a look at the flexible working application process.
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A study recently suggested that being given the option to work flexibly is amongst the most popular work benefits desired by UK employees. Meanwhile, separate research also revealed that 56% of professionals believe that working the traditional nine to five is 'outdated', whilst a further 39% have urged employers to abandon 'dated' working traditions. Here, we take a look at how employees can request to work flexibly, and how employers should respond.
Making a statutory application
All employees have the right to request flexible working, whether that be choosing to work from home or having flexible start and finish times. However, in order to be eligible, employees must have worked continuously for the same employer for at least 26 weeks.
Employees seeking to work flexibly must make a statutory application. Employees are required to write to their employer, outlining their request. Take note: only one application can be made per year.
The employer is obliged to consider the request, and reach a decision within three months (however, this may be longer, if agreed with the employee).
Approving the application
In the event that the employer agrees to the request, the terms and conditions of the employee's contract must be changed. The employer should write to the employee, giving them a statement of the agreed changes, and a start date for flexible working. This should be done no later than 28 days after the request was approved.
Rejecting the application
If the employer disagrees with the request, they are required to write to the employee, outlining the business reasons for the refusal. Many reasons exist for an employer to reject an application:
- extra costs associated with flexible working will damage the business
- work cannot be reorganized amongst other members of staff
- individuals cannot be recruited to do the work
- the quality of work and performance will be affected by flexible working
- the business will struggle to meet customer demand
- a lack of work exists during the proposed working times
- the business plans to make changes to its workforce.
Making an appeal
Employees do not have the statutory right to appeal a decision. However, an employer may choose to provide an appeals system, in order to help demonstrate that they are dealing with requests reasonably.
Employees may take the matter to an employment tribunal in cases where the employer:
- failed to handle the employee's request in a 'reasonable manner'
- incorrectly treated the employee's application as withdrawn
- dismissed the employee or treated them unfairly as a result of their request to work flexibly
- rejected the application based on false information.
Employees are not permitted to appeal simply because their flexible working request was rejected. Those employees that do appeal must do so within three months of:
- hearing their employer's decision
- hearing their request was treated as withdrawn
- the date the employer was required to respond to the request, but failed to do so.
Individuals unsure of their rights are advised to obtain legal advice.
Flexible working is likely to become more and more popular. Both employees and employers should ensure that they stay up-to-date on the rules regarding making an application to work flexibly.
Reviewing the changes to capital allowances
Considering the changes announced in the 2018 Autumn Budget.
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In the 2018 Autumn Budget, Chancellor Philip Hammond announced a handful of changes to capital allowances, including the introduction of a new allowance, termed the Structures and Buildings Allowance (SBA). Here, we take a look at these changes in more detail.
Alterations to the Annual Investment Allowance
The majority of firms are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure on most types of plant and machinery (excluding cars). The AIA applies to businesses of any size, and most business structures. However, provisions are in place to prevent multiple claims.
In the Budget, the Chancellor announced a temporary increase in the AIA, from £200,000 to £1 million. This applies to expenditure incurred from 1 January 2019 to 31 December 2020. Complex calculations may apply for businesses whose accounting periods straddle this period. Therefore, in order to make full use of the increase, firms should ensure they time the purchase of plant and machinery carefully.
The new Structures and Buildings Allowance
The SBA provides relief for expenditure on certain new, non-residential structures and buildings. Eligible construction costs incurred on or after 29 October 2018 will qualify for relief: this will be at an annual rate of 2%, on a straight-line basis. However, if a contract was entered into before this time, relief is not available.
New structures and buildings intended for commercial use are eligible for the SBA, alongside the costs associated with making improvements to existing premises.
Businesses chargeable to income tax and companies chargeable to corporation tax are able to claim the relief. The relief will be available from the date the structure or building is brought into use for the first time for a qualifying activity. Where the business is within the charge to UK tax, overseas structures and buildings are eligible for the SBA.
Qualifying activities and exclusions
It is important to note that only certain expenditure is eligible for the SBA. Structures and buildings must be brought into use for qualifying commercial activities. Types of structures and buildings covered include factories and warehouses; offices; hotels and care homes; walls; and retail and wholesale premises. However, the final list is yet to be clarified.
Under the initiative, certain exclusions apply: expenditure on land, residential property or other buildings functioning as dwellings is not eligible for the relief. Home offices are also not eligible. Where a structure or building has mixed use, such as between residential and commercial units, relief is apportioned.
Considering other changes
In the 2018 Autumn Budget, the Chancellor also announced a reduction in the rate of writing down allowance (WDA) on the special rate pool of plant and machinery. This is set to reduce from 8% to 6% from April 2019.
We can advise on all aspects of capital allowances – please contact us for more information.
Minimising your tax liability ahead of the year end
Tax-saving measures to implement ahead of the 5 April year end.
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With the end of the 2018/19 tax year rapidly approaching, now is the ideal time to ensure you are making the most of the available allowances and exemptions. Here we highlight some key areas to consider by 5 April 2019.
Making the most of capital allowances
When capital equipment, such as plant or machinery, is purchased by a business, the cost of the equipment can be offset against profits by claiming capital allowances.
Most businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure. Please note that special rules apply for cars and certain 'environmentally friendly' equipment. The AIA applies to businesses of any size and most business structures: however, provisions are in place to prevent multiple claims.
During the 2018 Autumn Budget, Chancellor Philip Hammond announced an increase in the AIA from its current level of £200,000 to £1 million. The increase will apply to expenditure incurred from 1 January 2019 to 31 December 2020. Accounting periods which straddle these dates will be subject to complex calculations: therefore, it is vital that purchases are timed carefully.
Making use of your ISA allowance
A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.
Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA. Savers have until 5 April 2019 to make their 2018/19 investment.
Retaining more of your profit
The Dividend Allowance reduced to £2,000 in April 2018, and the question of whether it is better to take a salary/bonus or a dividend requires careful consideration. Dividends are taken after corporation tax has been paid, while a salary or bonus is generally tax deductible for the business. However, a salary or bonus can carry up to 25.8% in combined employer and employee contributions.
Other tax-efficient ways of extracting profit might include considering incorporation, or making pension contributions.
Maximising personal allowances
Individuals are entitled to their own personal allowance (PA), which is set at £11,850 for 2018/19 (rising to £12,500 for 2019/20). If your spouse or partner has little or no income, you may want to consider transferring income or income-producing assets to them. However, care is required: the legislation governing 'income shifting' states that any transfer made must be an outright gift, given with 'no strings attached', so speak to us before taking any action.
Certain married couples may also be able to make use of the Marriage Allowance, which allows those eligible to transfer up to 10% of their PA to their spouse. The Marriage Allowance is available to married couples and civil partners where one spouse has income below the PA and neither spouse pays tax at the higher or additional rate. Up to £1,190 can be transferred in 2018/19, which could help to reduce a couple's tax liability by up to £238.
The strategies outlined above detail some of the ways in which you may be able to minimise your tax liability ahead of the 5 April tax year end. We are able to advise on these and many other tax-saving initiatives – please contact us for more information.
Making Tax Digital for VAT: the latest developments
Recent changes to the MTD for VAT initiative.
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With the introduction of Making Tax Digital for VAT (MTD for VAT) rapidly approaching, new developments may affect how certain businesses prepare for the measure. We take a look at the latest changes to the MTD for VAT regime.
MTD for VAT is set to come into effect from 1 April 2019 for businesses which have a taxable turnover above the current VAT registration threshold of £85,000. As part of the initiative, businesses must keep some records digitally, and must submit their VAT returns via an Application Programming Interface (API).
Any business making use of MTD for VAT whose turnover subsequently falls below the VAT threshold must stay in the regime, unless they deregister for VAT. Any firm exceeding the registration threshold after 1 April 2019 must comply with MTD for VAT, and is given 30 days to ensure that the appropriate digital software is in place.
Deferral for certain businesses
In October, HMRC's MTD for VAT guidance was updated, outlining a significant deferral of the initiative for certain businesses and organisations. A small group of taxpayers with 'more complex' requirements will be given an additional six months to prepare for MTD for VAT, and will therefore not be mandated to use the system until 1 October 2019.
The deferral applies to: not-for-profit organisations that are not set up as a company; trusts; VAT divisions; VAT groups; local authorities; public corporations; and traders based overseas. Public sector entities required to provide additional information on their VAT return, those who must make payments on account, and annual accounting scheme users are also covered by the deferral.
Meanwhile, HMRC also launched its second pilot scheme for MTD for VAT, inviting more than half a million UK firms to test the system ahead of its April introduction. The pilot is open for businesses with 'up-to-date and straightforward' financial affairs. HMRC intends to extend the pilot to 'most other business types'.
MTD for VAT 'encouragement letters'
HMRC recently sent businesses within the scope of MTD for VAT so-called 'encouragement letters'.
These letters were sent to 200,000 firms which are eligible to join the pilot scheme, and some VAT-registered businesses with a turnover just below the VAT registration threshold.
HMRC stated that it is 'committed' to writing to everyone within the scope of MTD for VAT.
When should I start to prepare for MTD for VAT?
Businesses are advised to begin preparing for the initiative now. Firms will need to ensure that they are using digital accounting records as soon as possible.
As part of MTD for VAT, every business will be required to make use of an online Business Tax Account (BTA). Firms which do not currently have a BTA are advised to set an account up ahead of the MTD for VAT start date. The first step is to generate a Government Gateway ID – this can be done here.
Preparing for and complying with MTD for VAT will undoubtedly prove to be challenging for many businesses. As your accountants, we are always on hand to answer any questions you may have – simply contact us for more information.
Taxing the tech giants: the new Digital Services Tax
Analysing the government's new Digital Services Tax.
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In his 2018 Autumn Budget speech, Chancellor Philip Hammond unveiled a so-called 'Digital Services Tax' (DST), which is set to come into effect from April 2020. The DST will require specific digital businesses to pay tax on sales generated in the UK. Here, we outline what we know so far in regard to the DST.
Taxing international digital businesses: a background
Over the past few years, a handful of large international companies have been subject to criticism for paying only small amounts of tax on their UK profits. The Chancellor previously stated that international agreements 'need to be put into place' to help tackle the issue; however, the Organisation for Economic Co-operation and Development (OECD), the body responsible for co-ordinating economic policy, has reportedly struggled to come to a decision on the matter.
The European Commission (EC) separately proposed an EU-wide 3% digital tax, but has so far failed to convince some EU member states.
Outlining the DST
From April 2020, the DST will apply a 2% tax to the revenues of certain digital businesses. The tax will raise £1.5 billion over four years, according to the government.
A double threshold will exist, meaning that businesses will have to generate revenues from in-scope business models of at least £500 million globally to become taxable under the DST. Government documentation states that the first £25 million of relevant UK revenues are not taxable. Small businesses will therefore not be within the scope of the tax.
Under ordinary principles, the DST will be an allowable expense for corporation tax purposes: however, it will not be within the scope of double tax treaties, and therefore it won't be creditable against corporate tax in the UK.
Who will be affected?
The DST will apply to large search engines, social media platforms and online marketplaces where their revenues are linked to the participation of UK users. The government is keen to emphasise that the DST is not a tax on online sales of goods, but rather a tax on the revenues earnt from intermediating such sales.
According to official documentation, financial and payment services, the provision of online content, sales of software and hardware, and television and broadcasting services will not be subject to the DST.
The DST: a temporary solution
The government expects the DST to be an interim solution, having effect only until an international decision is reached in regard to taxing digital services firms. A review clause will exist in order to allow a formal review to take place in 2025, to determine whether the DST is still required in light of international developments.
A consultation will be launched by the government to establish the finer details of the DST. By doing so, the government will make sure that all key concerns and challenges are addressed, and will also ensure the DST operates as intended, and does not place 'unreasonable burdens' on businesses.
The introduction of the DST in the UK will undoubtedly affect other countries' decisions in regard to the way they tax digital services firms. Commenting on the matter, Glyn Fullelove, Chair of the Technical Committee at the Chartered Institute of Taxation (CIOT), said: 'The best outcome would be that the announcemet... spurs the international community to find a globally-agreed solution to taxing digital multinational companies by 2020 so that this UK DST is never actually introduced.'
The DST will be legislated for in the 2019-20 Finance Bill.