Domestic Reverse Charges for Building and Construction Services
The domestic reverse charge essentially means that the end customer, who is VAT registered, pays any VAT due. Charges apply only to supplies between VAT-registered suppliers and VAT-registered customers. If you are supplying goods, VAT is neither charged (i.e. 0%) nor collected on the affected supplies. Instead, the end customer accounts for VAT on their own VAT return, as both a sale and a purchase. This simply leaves no VAT for the supplier to claim and disappear with.
The reverse charges have been implemented in a number of forms designed to protect the revenue and are a consequence of significant VAT losses experienced by HMRC and Tax Authorities across the EU. The VAT domestic reverse charge is explained in Notice 735 by HMRC as “an anti-fraud measure designed to counter criminal attacks on the UK VAT system by means of sophisticated fraud.” You may be aware of the terms MTIC (Missing Trader Intra Community) or Carousel Fraud. Very simply, MTIC fraud involves goods that were initially purchased VAT free by a UK VAT-registered business from another EU member state, supplied on with VAT added to another VAT-registered business in the UK. The supplier receives payment of the VAT from the customer but goes missing before paying the collected VAT over to HMRC.
Reverse charges in the UK fall into two categories: those designed to simplify VAT compliance/reporting, and those designed to protect the revenue. The reverse charge that you are most likely to be familiar with is the one that deals in business trading across borders. This was introduced throughout the EU to make it easier for businesses by saving them from having to register for VAT in every country that they are providing business services to. The general rule for most business-to-business (B2B) services is that they are deemed to be supplied where the customer belongs. While we are not looking in detail at the place of supply here, as it's not the most relevant part to the construction industry in this topic, information on B2B services can be found in Section 6 of Notice 741A Place of Supply of Services, and paragraph 6.4 of the same notice also provides details of services falling outside of the general rule.
The specific supplies to which the domestic reverse charge applies are listed in Section 3.1 of Notice 735. Supplies of mobile phones and computer chips were affected with effect from 1st June 2007; emission allowances from November 2010; wholesale gas and electricity from 1st July 2014; wholesale telecoms from 1st February 2016; renewable energy certificates from 14th June 2019 and building and construction services which will come into effect from 1st October 2020 delayed from October 2019. The link is here. https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
Deregistering a business - VAT
The basic criteria for claiming input tax back, is that the VAT has been incurred in the making of taxable supplies. There is an important distinction to make between whether you are buying a property with the intention of using it to trade from yourself or let to tenants under a licence to occupy. A business buying a commercial property to be let to tenants under a licence to occupy will be making a supply “of the land”, and therefore, unless they opt to tax their interest in that building, tax recovery will be restricted. However, a business buying and making taxable supplies themselves, i.e. selling products out of the property, will have no need to opt to tax to be able to claim the VAT back on the purchase of the building.
If you have registered mistakenly and are continuing to make taxable supplies, it is possible to deregister as long as you are able to satisfy HMRC that your taxable turnover for the next 12 months will not be more than the VAT deregistration threshold, currently set at £83,000. If your historic turnover is below this limit, and you have no anticipated changes to the business planned that would lead to an increase in turnover, it would be reasonable to expect that your turnover will remain below £83,000 and HMRC will likely agree to deregistration. It is important to note that where you are continuing to trade, the earliest date from which the HMRC will allow an application to deregister is the date it receives it. While a later can be agreed if necessary, an earlier one will not.
The consequence of deregistering whilst still in possession of a business property that the VAT has been reclaimed, is that you will need to pay output tax based on the current market value (not the initial purchase price) of the building. This figure will need to be included on your final VAT return and paid to HMRC. This is because of Schedule 4, paragraph 8 of the VAT Act 1994 which deems a supply of goods to take place when a person stops being a taxable person and has goods still on hand which form part of the businesses assets and on which input tax has been allowed.
HMRC VAT Manual VATSCO3360 “identifying a supply: Supplies of goods for no consideration: Goods which are business assets on hand at deregistration” provides detailed guidance on this matter. The link is here to the VAT notice.
The final point to note is that if you think this might apply to you and are within 6 months of the effective date of when you opted to tax, it can be possible for the option to be revoked. VAT Notice 724A: Option to Tax provides details of the conditions required to be met to revoke an option to tax within the six month “cooling off” period in section 8.1.2 and Paragraph F. The revocation is notified to HMRC on Form VAT1614C. The person revoking must meet all the conditions in 8.1.2 and one of the three conditions in Paragraph F in the following link is here.
If you meet all the conditions in 8.1.2 and a condition of Paragraph F, and the opt to tax is revoked prior to deregistration, then the deemed supply on deregistration would be exempt. This is one point that highlights the complexities of VAT and property. We highly recommend property transactions are considered thoroughly before they take place to ensure that the best VAT position can be achieved, so you may prefer to take advantage of our free consultation before embarking on your next move.
Home-offices and VAT
“goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”
HMRC’s Internal Manual VIT11500 also says “If VAT is incurred wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes.” https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit11500
The fundamental criteria is that the supply in question must be made to the business. If the company is limited, then the company should directly contract and pay for the building rather than the director claiming it as an expense, or through an adjustment to the director's loan account. This way the building is indisputably a company cost.
If you are a VAT registered sole trader it will be different because you can proportion items upon use between business and personal without benefit in kind implications. Whereas a limited company either owns the item which is wholly and exclusively used for the business or otherwise there will be tax implications; Benefit in Kind and Capital Gains Tax. The question of whether the purpose of the building will be deemed solely for the business can be problematic, as it's part of a private residence. There is no guarantee that HMRC will not enquire into the usage of the property and if you expect that it will be used in any way for private use, then an appropriate apportionment should be made on a fair and reasonable basis.
The issue can become more complicated if you're using the flat rate VAT scheme. Be careful of assuming that if the expenditure is over £2,000 that the VAT can be recovered under the capital expenditure goods rules. Building services and materials are not goods for VAT purposes. You may be able to argue that the purchase of a complete lodge or structure can be goods, but it's best to get specialist advice before you make a claim, just in case.
Also be aware that questions can arise if there is later a change of use back to private, non-business use. If the building use was reverted back to non-business within 10 years and it was purchased prior to 2011, then as part of the Supply of Services Order 1993 ( SI 1993/1507 as amended) an adjustment will need to be made. Since 1st January 2011, that was only necessary if the value of the expense was within the capital goods scheme: i.e. when the VAT exclusive value was over £250,000. The order does not apply, however, where there was previously an apportionment to reflect non-business use.
If you're unsure about the tax implications of a home office or any other expenditure, why not try a free consultation with us via https://www.certaxstalbansdistrict.co.uk/index.php/contact-us/free-consultation
Accidental Landlords: What you need to know about Principle Private Residence Relief
Imagine this: you buy your house in October 1997 for £155,000 (including conveyancer’s fees, etc). You keep the house and let it due to needing to move to a new home in October 2015. Your current rental agreement is coming up for renewal and you would like to take the opportunity to sell the house and stop being a landlord, but if you do so before October 2020 there is an early redemption penalty on the mortgage of £5,000 to pay. What do you do? It raises a lot of questions. How will your Capital Gains Tax position be affected by the delay? Especially, if you pay income tax at a higher rate and the property’s current value of £450,000 is unlikely to change in the next couple of years. If you sell the property on or after 6th April 2020 – as opposed to now or before then you will have the following impacts, in this example October 2020 being the date when you sell:
- Firstly, the final period exemption available, because you lived in the house before you rent it out, will fall from 18 months to 9 months which will result in £9,620 loss of relief.
- Secondly, Letting relief which is currently available provided you have lived in the house will only apply if you share occupation of their house with a tenant. This will result in £40,000 loss of letting relief which is the maximum.
- Higher rate tax payer will pay £11,903 more after April 6th 2020, before the tax bill was £0 i.e. pre April 6th 2020.
- Please note there are special rules which give 36 months relief to those with a disability, and those in or moving into care, which will not change.
- Overall, what this means you are worse off £6,903 compared to now after you paid early redemption penalty on the mortgage of £5,000 for selling.
Cash Accounting and Making Tax Digital
Bringing your business into line with the new Making Tax Digital guidelines can feel quite daunting. If you're not used to using an electronic accounting system on a day to day basis, then you may be concerned about switching to a digital system and whether you can also use those tried and trusted spreadsheets.
You can read about the guidelines and the implications direct here https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat on the government site, and here's some more information to help make it a little clearer. Essentially the guideline states that for both supplies made and supplies received a digital record should be kept of:
- the time of supply – the tax point;
- the value of the supply – the net value excluding VAT, and
- the rate of VAT charged for sales or the amount of input tax that you will claim for purchases.
To clarify, the time of supply, if you are cash accounting, is the date you receive payment or pay for the supply.
More importantly, what is not made entirely clear on the government notice is that the records don't just need to be digital, they also need to cross-reference to payments and receipts, which can indeed be done in the cashbook and effectively the cash book will become your digital record.
Businesses using the cash accounting system have always been required to cross-reference entries to their corresponding sales and purchase invoices so this isn't particularly new and MTD has not changed this. Simply recording a payment which covers several invoices, or part-pays a single invoice is not enough. The cross-referencing and date is important too.
You also need to be aware that statements from your suppliers that show multiple transactions cannot be posted as one entry. All invoices must be recorded individually and, as usual, retained for input tax deduction. There is one exception, which is described in the notice 700/22 and applies to HMRC’s definition of third-party agents: “where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record”.
In most cases, Making Tax Digital should not change the type of records you need to keep but does require those records to be entered in digital format. The advantage of Making Tax Digital is that record keeping should be a little easier in the long run, especially as more of your suppliers will communicate with you digitally, hopefully keeping paper filing to a minimum.
VAT Registration for Jointly Owned Properties
A. When a property is in joint ownership, the owners are treated by HMRC as a partnership for VAT purposes. In your client’s case, each of the trustees of the pension fund and the limited company, as a corporate entity, are the ‘partners’ in a new VAT partnership and need to apply for VAT registration as that partnership entity. It is worth mentioning that where a partnership registration is required in this way for VAT, it does not necessarily follow that the partners in the VAT partnership will be viewed as a partnership for the Partnership Act 1890.
If the company and pension fund want the rentals of the property to be taxable supplies then the VAT partnership would need to make an option to tax for the property, irrespective of the limited company having its own option to tax in place. The output tax on the rent would then be declared on the partnership’s VAT return. Neither the company’s nor the pension fund’s, own VAT registration would deal with the VAT aspects of the jointly owned property.
If the company and the pension fund are not treating themselves as a partnership for accounting purposes in recording the income for the property, then care will need to be taken to ensure that rent transactions and any costs relating to the property can clearly be identified to enable the VAT return for the partnership to be completed.
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