How do you reclaim CIS deductions?

two man holding white paper

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.

Limited companies

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:

  1. Form R38 to claim the Refund – Claim an Income Tax refund – GOV.UK (www.gov.uk)
  2. 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)
  3. 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
  • Amendment

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

  • Name
  • Agent details and address (if its being claimed by an accountant)
  • Business details
    • Name
    • UTR
    • 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
BX9 1BX
United Kingdom

steve@bicknells.net

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction

man in black long sleeves holding the signage while looking at the camera

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.

steve@bicknells.net

Why Builders and Contractors need to do Cost Value Reconciliation?

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 [2012] 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.

steve@bicknells.net

What is the optimum pay for 2022/23 – examples

serious ethic businessman working on laptop

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

Example 1

  • 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)

Example 2

  • 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

Summary

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.

steve@bicknells.net

Working from Home (home office) – what can you reclaim?

man using macbook

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:

  1. 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).
  2. 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

Simplified Expenses

You can only use simplified expenses if you work for 25 hours or more a month from home.

Hours of business use per monthFlat 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:

  • heating
  • electricity
  • 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.

Example

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).

steve@bicknells.net

How are HMRC attacking the use of TOMS for serviced accommodation?

The Tour Operators Margin Scheme (TOMS) was created for holiday companies.

Accommodation that is bought in and sold without material alteration, falls within TOMS. However, where there is material alteration the accommodation becomes an in-house supply and TOMS can not be used.

Further details are in Notice 709/5

7.6 How an in-house supply of accommodation is made

If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.

If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.

Also, if you buy in accommodation and provide catering staff from separate sources, for example a ski chalet with a chalet-maid, you are making an in-house supply, commonly referred to as ‘catered accommodation’.

HMRC are attacking the use of TOMS for Rent to SA

  • Rent to SA is not a tour operator and the services being supplied are not designated travel services – tour operators organise travel in their own name and entrust others with the supply
  • The supply made by the landlord is not a ‘designated travel service’ – taking a lease of residential premises, whether furnished or unfurnished for a term of years is not a relevant service for TOMS
  • The landlord is not supplying hotel accommodation or short-let accommodation
  • If the SA operator furnishes the property that is a material alteration which means TOMS can’t be used
  • If the contract requires the SA operator to replace broken glass or deal with condensation or do maintenance that would go beyond routine cleaning and minor repairs
  • If the SA operator is responsible for utilities and Council Tax these constitute a material alteration to supply

What about the Landlord?

The landlord is not supplying a Furnished Holiday Let unless they meet the Occupancy Conditions set out in HS253 this will not be the case in Rent to SA as they are not doing short lets they are simply renting out residential property on a long let. They will not be able to claim capital allowances and the they will not avoid section 24 interest restrictions.

steve@bicknells.net

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

Have you remortgaged? will that restrict the recovery of interest beyond the Section 24 rules?

Many Buy To Let properties were purchased in individual names, that was norm before, then from 2017/18 we saw the introduction of clause 24 (section 24).

Essentially Section 24 removes Interest from the property expenses and gives you tax relief (finance allowance) at 20% (basic rate). So Higher rate tax payers will pay more tax.

Historically, its been common for BTL owners to regularly remortgage and with draw capital, basically cashing in on house price rises.

But what many owners seem to have overlooked is that if the mortgage exceeds the original property value (including SDLT and related costs) plus any improvement costs, then the mortgage interest is further restricted.

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Examples of how to work out Income Tax when you rent out a property – GOV.UK (www.gov.uk)

steve@bicknells.net

The Tax Issues of Hire Purchase (HP), PCP and Leases for assets – Capital Allowances

When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance or Enhanced Capital Allowances.

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

  • equipment
  • machinery
  • business vehicles, for example cars, vans or lorries

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.

Hire Purchase

The normal assumption is that a vehicle bought under a HP agreement will become the property of the hirer once the final payment is made at the end of the lease period.

Section 67 Capital Allowances Act 2001 (CAA 2001) allows the capitalisation of the entire expenditure on the vehicle from delivery, providing the asset was in business use at the end of the chargeable period.

However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).

Q&A: hire purchase contract and capital allowances | Accountancy Daily

PCP – Contract Purchase

Under any other finance arrangement it will depend on whether the vehicle is owned or not, usually the documentation will confirm the position but a PCP is considered to be an HP arrangement with a balloon payment. If the end payment is not paid and the option to purchase not taken then that is a disposal and thus a clawback of the allowances claimed.

Contract Hire and Leases

Contract Hire will not pass ownership to hirer so they are not eligible for Capital Allowances.

But the hire costs will normally be tax deductible and generally 50% of car hire VAT can be reclaimed.

steve@bicknells.net