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For VAT reverse charge to apply the subcontractor must be able to answer these questions
- Is the work being done a construction activity (CIS340)
- Are both the Subcontractor and Contractor registered for VAT (and the VAT rate isn’t Zero) and CIS
- Does the contractor have an onward supply for Construction Services (in other words they aren’t the end user or an intermediary)
Assuming the answer to all 3 questions is YES then VAT reverse charge will apply and the subcontractors invoice need to look like this one.
Under the VAT Regulations 1995 invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfill the legal requirement:
•Reverse charge: VAT Act 1994 Section 55A applies
•Reverse charge: S55A VATA 94 applies
•Reverse charge: Customer to pay the VAT to HMRC
The Subcontractors VAT return will look this.
All the major software providers have this covered for you, for example on Sage Accounting you just need to tick a box on Customers Account Settings.
If you don’t have Gross CIS status you may have Construction Industry Scheme (CIS) deductions to reclaim and you will be probably be trying to reclaim now as we have concluded a tax year (5th April and submitted returns due on the 19th April).
Sole traders and partners
At the end of the tax year, send in your Self Assessment tax return as usual. You should record:
- the full amounts on your invoices as income
- any deductions contractors have made in the ‘CIS deductions’ field
HM Revenue and Customs (HMRC) will work out your tax and National Insurance bill and take off any deductions made by contractors.
The process for companies is different, companies may well have offset Subcontractors deductions and payroll against deductions made by their clients using CIS132 How to offset Construction Industry Scheme deductions – CIS Offsetting (CIS340 4.13) – Steve J Bicknell Tel 01202 025252
So the first step to work out the net amount to reclaim and check it to the HMRC Government Gateway.
You can choose to:
- Form R38 to claim the Refund – Claim an Income Tax refund – GOV.UK (www.gov.uk)
- Claim online via your government gateway (agents will use their Agent Services Account) – Claim a refund of Construction Industry Scheme deductions if you’re a limited company or an agent – GOV.UK (www.gov.uk)
- Claim by Post
Claim via the Government Gateway
When you click this option ad log in you will get an access code xxx-xxx-xxx, keep a not of this code, the next screen asks you to enter it.
The you can choose
- New Claim
I think the amendment option is very helpful in case you make a mistake (shame we don’t get this for other taxes like VAT or PAYE)
Then the questions are
- Agent details and address (if its being claimed by an accountant)
- Business details
- PAYE reference
- Tel No
- Business Address
- Tax Year for the claim ie 6th April 2021 to 5th April 2022
- Estimated overpayment (note the word estimated) this the net amount from the CIS132
- Do you want to offset against other taxes Yes/No
- Would you like a Cheque or Bank Transfer
- Bank details for bank transfer
- E Mail for confirmation
Then you will get a confirmation via E Mail ‘Claim repayment of deductions from your Construction Industry Scheme payments’ it will have another reference xxx-xxxx-xxx
You’ll normally receive a response within 25 days.
Claim by Post
Write to us and make sure that you include:
- your full company name
- your PAYE reference numbers
- the reasons for the overpayment
- a completed R38 form if you want your refund to be paid to an agent or other representative
If you want us to pay the refund into a bank account, you’ll need to provide the:
- bank account number
- sort code
- account holder’s name
If you want us to deduct your repayment from other amounts you owe for:
- Corporation Tax — include your Corporation Tax unique tax reference and either the end date of your accounting period or accounting period number
- VAT — your registration number and the VAT Return period
- other liabilities — include type of charge, year or period it refers to and any reference numbers you have
You do not have to send any supporting information with your claim, but we may request further details if your claim does not match their records.
Mark your claim ‘CIS’ and send it to:
National Insurance Contributions and Employer Office
HM Revenue and Customs
The rules are in
CG67900 – Capital Gains Manual: Businesses: Appropriations to and from stock in trade
Appropriation treated as a disposal – TCGA92/S161 (1)
Where an asset (which was acquired by a person otherwise than as trading stock) is later appropriated for use as stock in that person’s trade, the transfer is dealt with for trading profits as if there were a sale and purchase at market value, see BIM33630. For capital gains purposes, TCGA92/S161 (1) deems the asset to have been sold for its open market value at the date of transfer.
Election to defer CG charge – TCGA92/S161 (3)
Collection difficulties might arise because tax on chargeable gains may become due and payable before there has been a factual disposal of the asset. To relieve this problem, the trader may make an election under TCGA92/S161 (3). If an election is made, there will be no chargeable gain on the appropriation of the asset to trading stock. Instead, in the computation of trading profits, the market value of the asset will be reduced by the amount of the chargeable gain. The effect of an election is that the trading profits or losses will include the whole of the income profit and the capital gain accruing on the asset over the whole period of ownership.
So what happens if you have a develop a property and then decide to keep it as an investment rather than sell it?
This known as reclassification and there would be an immediate deemed disposal under ITTOIA 2005 s 172B and CTA 2009 s 157 as a result a taxable trading profit would calculated based on the market value.
The tax would be payable even though the property had not been sold and a profit had not been realised. No elections are available.
Cost Value Reconciliation and Cost Value Comparisons are used on construction projects, they are essential if you want to keep project on budget and report costs and revenue correctly.
The CVR not only looks at costs to date and sales revenue to date but also brings in committed costs, forecasts, contingencies, scope changes, stage of completion and forecasts.
There are two types of Revenue Valuation, Internal (for use with the CVR) and External (application for payment), what gets certified with the client is unlikely to be the true internal value. There may also be items disputed with the client.
The CVR then results in adjustments to both Revenue and Costs to give a true reflection of Profitability.
Costs should not be under estimated and Revenue should not be over estimated within the CVR.
The CVR is great tool to highlight spend issues early on and take action with the client to keep within budget.
Here is an example CVR from the Template Store Cost report template (online-templatestore.com)
The case of Mark Smith v HMRC  TC02321
The appellant in this case was trading as a builder who provided ground works for construction companies. He had an in house surveyor who produced his applications for payment, the clients surveyor certified the valuation within 3 weeks and the accountant recognised the value when certified. The contracts were fixed price and lasted up to 12 months, The business started as a Sole Trader and was subsequently incorporated.
HMRC opened an enquiry in 2001/2002.
The central issue before the tribunal related to the appellant’s computation of profits. It was admitted that his accounts understated the profits gained in a particular tax year. However, it was his contention that this was a “one-off”.
The tribunal held that HMRC’s assessments were in fact justified.
The reason why HMRC were successful was that in the case of Mark Smith he based his income on certified revenue, this meant that the profit was understated, within Construction “UK GAAP” requires revenue to be reported on application based on the CVR matching approach.
The details of the additional profits and tax for each year are as follows:
(1)2000/01: additional profits of £43,189 giving rise to tax of £17,275.60
(2)2001/02: additional profits of £65,205 giving rise to tax of £24,972.02
(3)2002/03: additional profits of £73,889 giving rise to tax of £27,737.86
(4)2003/04:additional profits of £70,023 giving rise to tax of £27,503.41
(5)2004/05: additional profits of £70,000 giving rise to tax of 27,704.18
(6)2005/06: additional profits of £65,240 giving rise to tax of £26,735.44
(7)2006/07: additional profits of £45,541 giving rise to tax of £18,671.81
Further guidance is in UITF40 which came in 2005 and basically stated revenue should be reported in line with work completed by the seller.
Under the principle of matching costs and revenue should be aligned.
Let’s focus on Directors owning their own companies.
A quick summary
- Primary NI threshold is changing on 6th July 2022
- Weekly – from £190 to £242
- Monthly – from 823 to £1048
- Annually – from £9880 to £12570 (which is also the income tax threshold)
That basically means an Annual amount of £11908 (3 months at £9880 and 9 months at £12570), £11908 is £992.33 per month (£12570 is £1047.50 per month).
So £992.33 will be below the Employee NI threshold.
However, the Employer NI threshold will be £9100 (£758.33 per month) and from that level Employers NI will be charged at 15.05% unless you have additional employees and are eligible for the Employment Allowance of £5000 (previously £4000).
Dividend Tax rates for 2022/23
- Allowance £2000
- Lower Rate 8.75%
- Higher Rate 33.75%
- Additional Rate 39.35%
National Insurance Rates for 2022/23
- Class 1 to the Upper Earnings Level 13.25%, then 3.25%
- Employer NI Rate 15.05%
- Employment Allowance £5000
Here some examples
- Salary £12570
- Dividends £2000 (dividend allowance)
- Interest from company £1000 (savings allowance)
- Total £15570
You will pay Class 1 Employee NI £87.72 (13.25% of (£12570 – £11908) [£662]) and your company will pay £522.24 (15.05% of (£12570 – £9100) [£3470])
Total NI Paid £609.96
The company will have saved 19% (at the lower rate) of (£12570 + £522.24 + £1000) x 19% = £2677.53 as these costs will be offset against profit
In order to get a dividend of £2000 the company will have been taxed £469.14 (19% of the gross amount)
- Salary £11908
- Interest £1000
- Dividends £37000
Employers NI will be £422.60
Dividend Tax will be £35000 – (£12570 – £11908) x 8.75% = £3004.58
In order to pay £37000 in dividends the company will need a profit of £45679 and will have paid 19% (assuming lower rate) which is £8679 corporation tax
In order to qualify for benefits including the state pension you have to earn above the Class 1 NI threshold
So it seems logical to opt for a Salary of £12570 (£1047.50 per month)
Above this level income tax starts at 20% and NI is 13.25% for the employee and 15.05% for the employer, overall thats 48.3% tax and NI (but the employer may be entitled to the employment allowance offsetting the employers NI and gross pay and employers NI are deductible against corporation tax)
If you have lent money to your company its worth paying some interest (at a commercial rate) as that is tax deductible for the company (saving 19% CT) and there is a savings allowance and in addition interest is not subject to NI, income tax starts at 20%
Dividends are better than salary because there is a £2000 allowance and then tax starts at 8.75%, but remember the company will have paid 19% CT on profits, so overall at lower rates of tax that 27.75% tax but dividends can only be paid if you make a profit or have profit reserves in the balance sheet.
If you are a client and want to try a specific combination perhaps adding other sources of income, let us know.
Many people have been and are now working from home and want to reclaim expenses. Due to its popularity its not surprising that HMRC have been looking closely at claims.
The rules are different for employees and the self employed.
Companies, Directors and Employees
Let’s start with employees.
The first critical point is that employees can only claim expenses if they have to work from home, if they voluntarily choose to work from home they can’t claim.
Then there are basically 3 options for employees and directors:
- Claim £6 per week – You’ll get tax relief based on the rate at which you pay tax. For example, if you pay the 20% basic rate of tax and claim tax relief on £6 a week you would get £1.20 per week in tax relief (20% of £6).
- Claim a % of actual expenses – HMRC suggest –
You may be able to claim tax relief for:
- gas and electricity
- metered water
- business phone calls, including dial-up internet access
You cannot claim for the whole bill, just the part that relates to your work.
In addition if you have costs such business insurance, repairs of business equipment, cost of cleaning materials to clean your business work area (COVID being a key reason) these would be allowable.
Claims should be submitted on expense claim forms with supporting calculations.
Capital Allowances are available on business equipment.
Mortgage Interest, Rent, Rates are not allowable as HMRC say that costs must be ‘wholly and exclusively for business’ and HMRC are unconvinced that employees/directors meet this criteria.
3. Rent part of your home to your company – To do this you need to create a licence agreement (we have template if you need one) with your company in order to allow it to occupy part of your property. It then pays you rent and service charges and you then claim all your expenses under Self Assessment.
This means you will need to complete the property section of the Self Assessment return as you are effectively becoming a commercial landlord but it means you can recover all relevant overheads and variable costs, mortgage interest would subject to section 24 (so excluded and then used in obtaining the Finance Cost Allowance), you can also include a proportion of rent and rates.
Whilst you home is usually exempt for Capital Gains Tax (PRR) your home office once rented out will not be.
Self Employed including Landlords
The Self Employed are generally treated more favourably than employees when it comes to working from home.
There are basically 2 options
You can only use simplified expenses if you work for 25 hours or more a month from home.
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
% of Actual Costs
You can claim a proportion of your costs for things like:
- Council Tax
- mortgage interest or rent
- internet and telephone use
You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.
You have 4 rooms in your home, one of which you use only as an office.
Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).
If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).