What if you fail to register for CIS Reply

The Construction Industry Scheme (CIS) applies to anyone who carries out construction work as a trade, in other words developers, contractors, building maintenance and repairs, decorating, property conversion, basically if you use sub-contractors to work on a building its probably within CIS. It does, however, exclude property investors (although this could change soon) and domestic householders.

Tax Aid have a good example of how it works

Rob is asked to undertake some repair work on Ben’s private house. He asks Wendy to help him with the electrical work. Wendy is working on a self-employed basis for this contract. Ben pays Rob without deduction of tax as Ben is a private householder. Rob then pays Wendy.

Rob should register under CIS as a contractor before making the payment to Wendy. Rob should ask Wendy for her UTR and check her CIS status with HMRC. He should then pay Wendy net of 20% tax or net of 30% tax depending on her status with HMRC (exceptionally, if Wendy is entitled to register with HMRC for gross payment, then HMRC would tell Rob that he can pay Wendy without deduction of tax; gross payment will only apply to larger businesses).

If HMRC advises Rob that Wendy is registered under CIS (but not for gross payment), then Rob will keep back 20% tax and pay this CIS tax across to HMRC on Wendy’s behalf.

If Rob failed to register as a contractor under the CIS scheme he could face very big penalties. These include a £3,000 fine for not keeping CIS records, and a £100 per month penalty per missed return (and returns are due monthly).

Failing to register for a number of years could lead to penalties in the tens of thousands of pounds. This can happen even when all the workers are registered as self-employed and have paid the tax due on their income.

In summary the penalties are:

The maximum penalty is currently £3,000 for failing to register then there are late filing penalties

How late the return is Penalty
1 day late £100
2 months late £200
6 months late £300 or 5% of the CIS deductions on the return, whichever is higher
12 months late £300 or 5% of the CIS deductions on the return, whichever is higher

For returns later than this, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.

There is no lower limit for CIS registration and the penalties can be harsh as demonstrated in the cases below

Brian Parkinson a gardner and lanscaper who used occasional subcontractors and got £31,500 in CIS Penalties!

The FTT heard evidence that little or no loss of tax resulted from this omission, as the amount of tax Parkinson ought to have deducted under the CIS was put at £837.90. [Brian Parkinson and the Commissioners for Her Majesty’s Revenue & Customs TC04526; Appeal number: TC/2013/00224].
This comprised £6,000 (5 x the £1,200 maximum) charged under the Taxes Management Act 1970 (TMA 1970), s98A(2)(a) and also month 13 penalties of £25,500 charged under TMA 1970, s. 98A(2)(b). – See more at: https://www.accountancylive.com/partial-win-gardener-over-%E2%80%98excessive%E2%80%99-cis-penalties#sthash.zJA59Gjv.AfCNNGRJ.dpuf
Or how about CJS Eastern an installer of lightning conductors

INCOME TAX – subcontractors – appellant company contracted with a third party provider to supply “operatives” – third party provider “net” for CIS purposes – company’s failure to make CIS returns  – fixed monthly penalties of £28,500 – Month 13 penalties of £56,500 – whether reasonable excuse – held, no – whether disproportionate as a breach of A1P1 – Tribunal’s jurisdiction and interaction with mitigation –  Bosher followed – fixed penalties upheld – Month 13 penalties set aside as excessive – appeal allowed in part

https://cases.legal/lang-en/act-uk2-156151.html

If you work in construction make sure you register and comply with CIS!

steve@bicknells.net

What information will you need to report under Making Tax Digital (MTDfB)? Reply

Once the election is over, Making Tax Digital will be pushed forward again, ready for its launch in April 2018.

If you aren’t using any software or apps to prepare your accounts, now is the time to start. Under MTDfB – Making Tax Digital for Business – Sole Trader, Partnerships, Landlords and ultimately Companies will need to file returns every quarter and submit a final year end return.

This what you will need to report

The categories of information listed below are being reviewed and have not yet been finalised. They have been included mainly for indicative purposes.

https://www.gov.uk/government/publications/bringing-business-tax-into-the-digital-age-legislation-overview/bringing-business-tax-into-the-digital-age-legislation-overview#schedule

Non-property businesses

Income:

  • turnover, takings, fees, sales or money earned
  • any other business income

Expenses:

  • cost of goods bought for resale or goods used
  • construction industry – payments to subcontractors
  • wages, salaries and other staff costs
  • car, van and travel expenses
  • rent, rates, power and insurance costs
  • repairs and renewals of property and equipment
  • phone, fax, stationary and other office costs
  • advertising and business entertaining costs
  • interest on bank and other charges
  • bank, credit card and other financial charges
  • irrecoverable debts written off
  • accountancy, legal and other professional fees
  • depreciation and loss/profit on sale of assets
  • other business expenses
  • goods and services for your own use
  • income, receipts and other profits included in business income or expenses but not taxable as business profits
  • disallowable element for each category

Property businesses

Income – furnished holiday lettings:

  • rental income and any income for services provided to tenants

Expenses – furnished holiday lettings:

  • tax taken off income
  • rent paid, repairs, insurance and cost of services provided
  • loan interest and other financial costs
  • legal, management and other professional fees
  • other allowable property expenses
  • private use adjustment
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • property repairs and maintenance
  • costs of services provided, including wages

Income – property:

  • rental income and other income from property

Expenses – property:

  • tax taken off any income from total rents
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • rent, rates, insurance, ground rents etc.
  • property repairs and maintenance
  • loan interest for residential properties and other related financial costs
  • other loan interest and financial costs
  • legal, management and other professional fees
  • costs of services provided, including wages
  • other allowable property expenses
  • private use adjustment

Partnerships

Interest and alternative finance receipts without UK tax deducted:

  • interest and alternative finance receipts from UK banks and building societies paid without tax deducted
  • interest distributions from UK authorised unit trusts and UK open-ended investment companies and investment trusts
  • income from National Savings and Investments
  • other untaxed income from UK savings and investments (except dividends)

Interest and alternative finance receipts with UK tax deducted:

  • other taxed income from UK savings and investments (except dividends) (amount net of tax deducted)
  • tax deducted

Dividends:

  • dividends and other qualifying distributions from UK companies
  • tax credits attached to such dividends etc
  • dividend distributions from UK authorised unit trusts and open-ended investment companies
  • tax credits attached to such distributions
  • stock dividends from UK companies
  • tax credits attached to such stock dividends
  • non-qualifying distributions and loans written off
  • tax credits attached to such distributions etc

Other income received without UK tax deducted:

  • other income – profit
  • other income – loss

Other income received with UK tax deducted:

  • other income (amount net of tax deducted)
  • tax deducted

Partnerships – end of year information

Disposal of capital assets – partnerships:

  • description of assets
  • whether listed or unlisted shares or securities (if applicable)
  • name of partners who benefited from the disposal proceeds
  • total proceeds from disposal

End of year information

Tax adjustments and elections:

  • adjustment required where the basis period is not the same as the accounting period under section 203 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
  • averaging adjustment applied to taxable profits where an election has been made for averaging under section 222 or 222A of ITTOIA 2005
  • adjustment required as a result of a change in basis under Chapter 17 of Part 2 of ITTOIA 2005
  • total of any construction industry scheme deductions taken from payments made to subcontractors under section 61 of Finance Act 2004
  • any other tax deducted from trading income (excluding deductions made by contractors on account of tax)
  • sums due to be charged under sections 277 to 285 of ITTOIA 2005
  • adjustments required under Chapter 7 of Part 3 of ITTOIA 2005
  • claims for loss relief under Chapter 2 of Part 4 of the Income Tax Act 2007 (Chapter 4 for property businesses)
  • disallowable expenditure
  • foreign tax deducted
  • any other tax adjustment
  • adjustment on change of basis
  • foreign tax deducted

Capital allowances – claims and balancing charges:

  • annual investment allowance
  • capital allowances at 18%
  • capital allowances at 8%
  • restricted capital allowances on cars costing more than £12,000 where bought before 6 April 2009
  • business premises renovation allowance
  • enhanced capital allowances: energy-saving relief
  • enhanced capital allowances: environmentally-beneficial relief
  • enhanced capital allowanced: electric charge-points
  • enhanced capital allowances: gas refuelling equipment
  • allowances on sale or cessation of businesses use (where an asset has been disposed of for less than its tax written down value)
  • total capital allowances
  • balancing charge on sale or cessation of business use (where business renovation allowance has been claimed)
  • balancing charge on sales of other assets or on the cessation of business use (where an asset has been disposed of for less than its tax written down value)

 

steve@bicknells.net

The Mini Finance Bill Reply

The Finance Bill 2017 was to be the largest at 762 pages but in order to rush it though it was cut to 148 pages!

That’s an 80% reduction dropping 72 out of the 135 clauses and 18 out of 29 schedules.

One of the items dropped was Making Tax Digital (MTD).

But its widely expected that following the general election there will be another bill to bring in all the items that were dropped.

Our tax system is already far too complex:

  • 6,102 pages of legislation (according to Tolleys in 2012)
  • 639 monetary values
  • 425 thresholds
  • 214 penalties

Its a shame they couldn’t cut all the tax rules by 80%!

 

steve@bicknells.net

Can HMO’s and Residential Properties claim Capital Allowances? Reply

Capital Allowances are for commercial properties.

https://stevejbicknell.com/2017/02/21/why-are-capital-allowances-important-on-commercial-property/

They can be worth a lot money, sometimes a third of the property value can be plant and machinery and they are often over looked and under claimed.

There are companies who say you can claim them for HMOs but that doesn’t fit with rules!

Yes you could but them on your tax return but that doesn’t mean you have a valid claim as HMRC have process now and check later approach.

Here are the rules…

Capital Allowances Act 2001

http://www.legislation.gov.uk/ukpga/2001/2/section/35

The person’s expenditure is not qualifying expenditure if it is incurred in providing plant or machinery for use in a dwelling-house.

General: Definitions: Dwelling house

CAA01/S531

There are several references to dwelling house in CAA2001. The term appears in Part 2 (plant and machinery allowances), Part 3 (industrial buildings allowances), Part 3A (business premises renovation allowances), Part 6 (research and development allowances) and Part 10 (assured tenancy allowances).

For Part 10 (ATA) only “dwelling house” is given the same meaning as in the Rent Act 1977 (CAA01/S531).

There is no definition of “dwelling house” for the other Parts and so it takes its ordinary meaning. A dwelling house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence. In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact.

A person’s second or holiday home or accommodation used for holiday letting is a dwelling house. A block of flats is not a dwelling house although the individual flats within the block may be. A hospital, a prison, a nursing home or hotel (run as a trade and offering services, whether by the owner-occupier or by a tenant) are not dwelling houses.

A University hall of residence may be one of the most difficult types of premises to decide because there are so many variations in student accommodation. On the one hand, an educational establishment that provides on-site accommodation purely for its own students, where, for example, the kitchen and dining facilities are physically separate from the study-bedrooms and may not always be accessible to the students, is probably an institution, rather than a “dwelling-house”. But on the other hand, cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by students is, in a sense, incidental.

The common parts (for example the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house.

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca11520

steve@bicknells.net

Making Tax Digital – the Pilot has started! Reply

Whether you like it or not, Making Tax Digital is coming to us all!

HM Revenue and Customs’ (HMRC) ambition for most businesses to keep records digitally and send quarterly summary updates moves a step closer with the launch of the Making Tax Digital for Business (MTDfB) pilot.

In April, HMRC will invite some customers, both businesses and their agents to sign up for a new way to report income and expenses online. At different stages of the pilot customers will help HMRC develop and improve the new service by:

  • using accounting software to record their business income and expenses
  • sending summary reports of their income and expenses direct from their digital records quarterly or more often if they choose
  • signing up to go paperless

Based on the information they report, customers will get an estimated tax calculation.

As soon as the new service has been tested with the first group of businesses and agents, other customers will be able to join the pilot. These customers will be able to report their income and expenses for the quarter they join as well as any previous quarters.

Customers who aren’t invited to take part in the pilot at the beginning won’t be able to start sending quarterly reports to HMRC immediately, but they can:

  • start to use accounting software to keep their records if they don’t already

  • check with their software supplier, or agent, that any software they use is compatible with quarterly reporting

https://www.gov.uk/government/news/hmrc-launches-a-new-way-to-report-income-and-expenses-online

steve@bicknells.net

How many properties do I have for SDLT? Reply

Above is the diagram from Consultation

But what if you own properties in Companies and Partnerships (registered with HMRC with UTR’s)? Does that mean you own multiple properties?

I spoke to the HMRC SDLT Office about this and they said properties owned by other entities are not owned by an individual so shouldn’t count.

Phone

Call HMRC for help with Stamp Duty Land Tax queries.

Telephone:
0300 200 3510

Opening times:

8.30am to 5pm, Monday to Friday

 

We all want to get things right and follow the rules, so if you file an SDLT return you have 12 months to amend it and during that time you can write to HMRC and set out the exact circumstances, so if you have made a mistake it can be corrected.

The address to write to is

BT – Stamp Duty Land Tax
HM Revenue and Customs
BX9 1HD
United Kingdom

steve@bicknells.net

 

 

Do you have to charge VAT when you buy things for clients? 1

When you buy things for your client on their behalf the items could be excluded from your VAT calculations if they are Disbursements

To treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.

An example of an invoice showing disbursements and recharges

A website design consultant based in London does a week’s work for a client in Edinburgh. The consultant visits the client’s premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.

The consultant and the client agree the following fees:

Activity Fee
Consultant’s work £2,500 plus VAT
Consultant’s travelling expenses £300
Website hosting package purchased on the client’s behalf £150

The £300 travel cost that the consultant recharges to the client is not a disbursement so the consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:

  • it was purchased for the use of the client
  • the client agreed that the consultant would arrange and pay for it on their behalf – this means the consultant agreed to act as the client’s agent
  • the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
  • it was the client’s responsibility to pay for the goods
  • the consultant had permission from his client to make the payment
  • the client knew the web hosting package was from another supplier and not from the consultant
  • the consultant showed the costs separately in the invoice
  • the web hosting package paid for by the consultant is additional to the other services being billed to the client

The consultant’s invoice to their client for this work might include the following items:

  • design services – £2,500
  • travelling expenses – £300
  • amount on which VAT is due – £2,800
  • VAT at 20% – £560
  • disbursements – £150
  • total including VAT – £3510

steve@bicknells.net

What are the rules on subsistence and travel? 3

One of the most frequently asked questions from business owners and employees is ‘how much can I claim for meals and travel?’

Its such a common question that HMRC have a specific notice (490 Employee Travel) which explains the rules with examples

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517266/490.pdf

Here are some of the key points:

Section 1.7 Tax Relief

If an employee is obliged to incur travelling in the performance of their duties, provided the journey isn’t ordinary commuting they employee is entitled to tax relief on the full cost of Travel.

Section 3.2 Ordinary Commuting

Ordinary Commuting is travel to/from a permanent place of work, normally from/to home

3.8 excludes Private Travel

3.12 states that Non Exec Directors traveling to the company for board meetings is Ordinary Commuting

Section 3.18 The 24 Month Rule

In summary if you work at temporary place of work for less than 24 months you may be able to get tax relief.

Section 3.36 Employees who work from Home

If an employee performs substantive duties at home, then it may be treated as their place of work.

Where this is the case travel to other work places will be business travel.

Section 5.1 The Amount of Tax Relief

If the trip qualifies as business travel then the full cost will be allowed for relief, you don’t need to try to save money on the cost of the trip!

Section 5.4 Subsistence

Subsistence includes:

  • any necessary subsistance in the course of the journey
  • the cost of meals at a temporary workplace
  • the cost of meals as part of an overnight stay

Section 5.12 Scale of Expenditure

Where the travel is unusually lavish HMRC will consider whether the trip is really a reward or part of remuneration, but this is rare and HMRC will not seek to deny costs because for example you travel first class rather than second class.

Section 8.4 Incidental Expenses

These are £5 in the UK and £10 when overseas per night to cover expenses such as Laundry, Phone Calls and a Newspaper

Section 8.14 Unpaid Directors

Unpaid directors are entitled for relief for any they receive to cover travel

Scale rate payments

If you provide your employees with a set amount of cash for some common business expenses like travel and meals, these are known as ‘scale rate payments’.

As long as your employee has actually spent the scale rate payment on business expenses, you won’t need to check every single receipt – it’s fine to just check a sample.

You can set up a scale rate payment by either:

https://stevejbicknell.com/2015/12/16/201617-rules-on-the-tax-free-allowance-for-sandwiches/

steve@bicknells.net

When do you pay Capital Gains Tax on a Property Sale? 1

One family house for sale

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

So it doesn’t apply to Property Developers, their profits are trading income not investment income.

Disposing of an asset includes:

If you sell a property that your have lived in you will probably qualify for Principle Private Residence Relief

https://stevejbicknell.com/2015/04/13/how-does-principle-private-residence-relief-work/

Even it it wasn’t your Principle Private Residence but you did own it personally you will still get an allowance of £11,100 tax free.

Companies get an indexation allowance

https://stevejbicknell.com/2012/06/17/capital-gains-tax-for-companies/

Residential properties don’t qualify for business asset rollover relief.

Once you have worked out your gain, the choices for individuals are:

Report your gain and pay straight away

You can use the Report Capital Gains Tax online service for the 2016 to 2017 tax year (6 April 2016 to 5 April 2017) if you’re a UK resident.

You’ll need a Government Gateway account – you can set one up from the sign-in page.

You don’t need to wait for the end of the tax year – you can use this service as soon as you’ve calculated your gains and the tax you owe.

Report in a Self Assessment tax return

Use Self Assessment to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment by 5 October following the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

Report Company Capital Gains in a Corporation Tax Return

Report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay depends on any allowances and reliefs you claim.

steve@bicknells.net

Is your Expense Checking System up to scratch? Reply

Angry tax inspector looking serious and determined

HMRC have guidance in EIM30275 and EIM30270 which set out what they expect, so for example, this is what they expect the expense checking process to be for a one man company

Model D – One man company

Single employee of a one man company working at a series of temporary workplaces. Claiming benchmark scale rates.

Employee maintains a diary and time sheet to confirm occasions when travelling in the performance of their duties and retains receipts in respect of subsistence costs.  An independent third party performs regular monthly checks on a sample of the employees’ records to confirm that the relevant conditions for the exemption were met on each occasion. Checks are performed at random and the employee does not know in advance which journeys will be checked.

Independent third party would generally mean your accountant, but as HMRC encourage people to file themself many One Man Companies won’t have an accountant, so who does the checking then?

Lets see what bigger companies need to do?

Model C – Small employer

Small employer with less than 100 employees who regularly travel in the duties of their employment. Employer pays benchmark rates

Employer checks a random 10% of all claims.  Checks to be independently checked and authorised, and vouched by reference to employee diaries, work schedules and time sheets to confirm that employees were travelling in the performance of their duties on the date of the claim, and receipts to demonstrate that employees had in fact incurred costs whilst travelling. Employees should be aware that they might be subject to review at any time, and not be given notice that any particular claim will be subject to review.

The employer will have to be able to satisfy HMRC that their 10% sample really is a random one – for example, every 10th claim received.  HMRC will accept the evidence produced by such an exercise as being random for the purposes of confirming that employees meet the qualifying conditions for payment of the scale rate.

Employees required to retain receipts for a period of twelve months from the date of expenditure.

I think for small employers this would probably work and is achievable.

What system do you use? Do you think HMRC would accept your system?

steve@bicknells.net