HMRC have announced that VAT payments due between 20 March 2020 and 30 June 2020 will automatically be deferred to help businesses.
- This therefore includes the VAT Return payments due for the periods ended 29 February, 31 March and 30 April 2020 and any VAT Payments on Account due in that period.
- VAT returns should be prepared and submitted as normal by the due date.
- This will be applied automatically, there is no need to call HMRC to apply for the deferral.
- Tax payers will be given until 5 April 2021 to pay any VAT liabilities that have accumulated during the deferral period.
- If you are due a refund on your VAT return, HMRC will process these refunds as normal.
Where you pay by Direct Debit – If you have a direct debit set up to take VAT payments automatically, you will need to cancel this to make sure that the payment is not made to HMRC as soon as possible.
Changes to the way that builders charge VAT for their services are being introduced from 1 October 2019. The guidance issued by HMRC does not give detailed examples and we expect further details and examples to be released in Spring 2019.
The change in rules from 1 October 2019 will affect VAT registered builders providing certain construction or building services to another VAT registered business for onward sale/supply. There are some exceptions where the new rules won’t apply, typically it will apply to work that falls within the construction industry scheme.
The Reverse Charge Mechanism
Under the current rules where both businesses are VAT registered and where the building work is normally standard rated for VAT, a subcontractor charges VAT on the supply of building work to contractors, the contractor would pay the VAT to the subcontractor and the subcontractor would pay this VAT to HMRC.
Under the new rules that apply from 1 October 2019, this will now be treated under the Reverse Charge rules. The invoice to the contractor will need to state that the service is subject to the domestic reverse charge.
The contractor will need to treat any VAT under the reverse charge rules as both input and output VAT. The result for the contractor is a nil net tax position, as they are including the VAT as both input and output VAT.
For the subcontractor, this may lead to VAT returns being submitted where repayments of VAT are due to them from HMRC, as no VAT will be charged under the reverse charge rules. This could potentially lead to delays for some businesses in receiving VAT refunds from HMRC.
The contractor needs to know whether they are dealing with the final customer, as the reverse charge only applies between businesses. VAT should be charged to the end customer.
Back in November, it was announced that changes will be made to the Flat Rate VAT Scheme, due to what was termed aggressive abuse of the scheme. The changes will take effect from 1 April 2017.
The flat rate scheme was introduced to simplify VAT returns for businesses that fall within the scope (turnover limit) to use the scheme. The changes will mean that any businesses registered to use the flat rate scheme will have to consider if they are “limited cost businesses” and whether the new flat rate percentage of 16.5% will need to be used.
This change will affect businesses that are mostly “labour only,” which a number of contractors will be.
VAT Notice 733 has sections that gives more information on who is considered a limited cost business.
Sections 4.4 says;
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1000 per year
If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.
The notice goes on to describe what is and what is not a relevant good;
Examples of relevant goods
This isn’t an exhaustive list:
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for your business
- fuel for a taxi owned by a taxi firm
- stock for a shop
- cleaning products to be used exclusively for the business
- hair products to use to provide hairdressing services
- standard software, provided on a disk
Relevant goods are goods that are used exclusively for the purposes of your business, but don’t include:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value, see paragraph 15.1
- goods for resale, leasing, letting or hiring out if your main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
- any services
Examples of supplies that aren’t relevant goods
This isn’t an exhaustive list:
- accountancy fees, these are services
- advertising costs, these are services
- an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- laptop or mobile phone for use by the business, this is excluded as it is capital expenditure see paragraph 15.1
- anything provided electronically, for example a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
- software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
As services are not considered a relevant good, it will likely mean that a number of businesses will be caught by the change. For example, a business that has high sub-contractor costs may fall in to the limited cost business definition, as sub-contractors costs are considered services.
For businesses that use the flat rate scheme, it may be more beneficial to move to another scheme. We can advise on the other VAT schemes that are available and what needs to be done to change.