VAT MOSS is changing

Businesses that sell digital services (eg, ebooks) to non-business customers in other EU countries need to account for the VAT due at the rate applicable in the country where the customer belongs. This rule currently applies to any amount of digital sales made, there is no de minimis threshold.

The VAT charged to those overseas customers must be reported through the VAT MOSS system for each calendar quarter, unless the business is going to register for VAT in each separate jurisdiction that is sells within.

The good news is that a minimum sales threshold of €10,000 (£8,818) is being introduced from 1 January 2019 for digital services sold to consumers into other EU countries. A business can ignore the VAT MOSS rules if the value of its digital services sold to overseas customers in the calendar year is below that threshold, and the sales for the preceding year were also under that threshold. The business will have to apply the VAT rules of its home country to any sales it makes.

The bad news is that this de-minimis sales threshold only applies to businesses which are located within an EU country. When the UK leaves the EU on 29 March 2019, unless the VAT MOSS rules are covered in the EU withdrawal agreement, the new sales threshold will disappear for UK businesses. UK businesses will then have to register for the VAT MOSS non-EU scheme in an EU member state.

VAT on imports and exports

When you import from, or export to, countries in the EU, you generally don’t have to worry about VAT or customs duties. That may change when the UK leaves the EU at 11pm on 29 March 2019.

It’s possible that the UK will leave the EU automatically by operation of the law (having triggered Article 50) with no withdrawal agreement in place. In that case the UK will immediately be treated as a third country in relation to the EU for all trading purposes, including for customs duties and VAT.

For imports, the VAT will have to be paid at the border before the goods can enter the UK. Similarly, your EU customers will have to pay VAT at the border when they buy goods from your company which is based in the UK.

Exporting is more complicated. For example, to ship goods into the EU your business will need an EORI number, and the commodity code for the goods. You may also need a special licence to move the goods, particularly for food or animal products, and tariffs may be imposed under world trade organisation (WTO) rules.

If all your overseas business is currently done with customers or suppliers in other EU countries, you will need to quickly get to grips with VAT on imports and exports and the customs procedures required. HMRC has recently written to businesses in your position, with advice on where to look for guidance on those issues. There are nine detailed Gorvernment guides on importing and exporting procedures that will come into force if there is no deal on the withdrawal from the EU which you can read here: https://tinyurl.com/NodealBRImEx

VAT and the construction industry

HMRC has long seen the construction industry as an area where tax avoidance is rife. The construction industry scheme (CIS) was imposed as a means to prevent labourers dodging tax on cash-in-hand payments.

The latest dodge concerns VAT charged by labour suppliers to their customers, who are normally larger builders. The customer pays the VAT on the supply of labour, and reclaims the VAT as input tax on its VAT return. However, the labour supplier never pays the VAT over to HMRC, and often disappears before the taxman can catch up with them.

To counter this VAT avoidance, HMRC will introduce a reverse charge for VAT on labour supplies, with effect from 1 October 2019. This change is a year away, but it will take time to adjust your systems to the new rules.

Under the reverse charge, the customer (the large building company) will account for the VAT on labour supplies to HMRC, rather than the labour supplier. So the building company pays the VAT to HMRC (output tax) and reclaims that same VAT as input tax. The labour supplier issues an invoice which indicates that the supplies it has made are subject to the reverse charge.

The types of businesses affected by this new reverse charge include those involved in all aspects of construction of buildings or structures, including decoration and cleaning during construction. It won’t cover the work of architects or surveyors. The reverse charge will apply up through the supply chain until the point where the customer is not making a supply of relevant services on to another business.

VAT option to tax

If you have owned your commercial building for 20 years or more, you should review its VAT status. Such older buildings won’t have VAT attached to their sale or rent, unless the owner or leaseholder has opted to apply VAT, the so-called “option to tax”.

So ask yourself these questions about your commercial property:

  • Have you ever made an option to tax on this property?
  • If you opted to tax, can you prove that? The evidence would be a copy of form VAT1614 and acknowledgment from HMRC.
  • If you opted to tax the building more than 20 years ago, is it now appropriate to revoke that election?

You will need quick answers to all of these questions if you want to sell the property, as the buyer’s legal team will certainly ask for evidence that VAT on the sale is being correctly charged. Not all businesses can recover VAT, so some purchasers will want to buy or lease a building which doesn’t have VAT added to the price.

If you think an option to tax is in place, but you don’t hold the evidence, you could write to HMRC asking for a copy of the election. However, HMRC will take weeks to reply, and when the election was made many years ago they may not have the paperwork either.

If you have never let the property, and it was acquired with no VAT charged on the purchase, it’s probably safe to assume that an option to tax has never been made.

A common misunderstanding is that once a property is the subject of an option to tax it remains an “opted property” when it is sold. This is not the case. Each subsequent owner can make an independent decision as to whether to opt to tax the building or not.

Class 2 NIC is not abolished

Self-employed individuals pay two types of national insurance contributions (NIC); class 2 at a flat rate of £153.40 per year if annual profits are at least £6,205, and class 4 which is calculated as 9% of profits above £8,424, reducing to 2% of profits above £46,350.

Class 2 NIC buys entitlement to the state pension and certain other benefits; class 4 NIC buys no such entitlements.

The Government had proposed merging classes 2 and 4 NIC. The self-employed would pay one class of NIC, which would provide state benefit entitlements, and a NIC credit given for profits between £6,205 and £8,484. However, it has now decided not to go ahead with that merger.

This is good news for those with profits of less than £6,205, as they can continue to pay class 2 NIC voluntarily at £153.40 per year, to accrue state pension entitlements. The alternative for those with very low profits would be to pay class 3 NIC of £761.80 per year, but class 3 NIC doesn’t provide entitlement to other state benefits.

Non-resident individuals, who previously lived in the UK for at least three years and paid NIC during that time, will be able to pay class 2 NIC on a voluntarily basis to build entitlement towards the UK state pension and other benefits.

Electric cars

Employees who drive electric company cars can feel short-changed, as they charge-up at home, but don’t get reimbursed for the power used on business journeys. Now employers can reimburse drivers of electric company cars up to 4p per mile for each business mile driven since 1 September 2018, with no tax implications.

What’s more, the company can allow employees to charge company or privately owned electric vehicles at the company’s premises for free, without incurring a taxable benefit.

The downside of having an electric company car is the high taxable benefit, currently calculated as 13% of the vehicle’s list price when new. This is due to rise to 16% of the list price for 2019/20, but strangely will drop back to 2% from 6 April 2020. If you are thinking of taking on an electric company car, you will save tax if you wait until 2020.

When you change your company car for a different model you should report this to HMRC through your online personal tax account (www.gov.uk/personal-tax-account). The employer is only required to inform HMRC when the employee is provided with a company car for the first time, or the car is withdrawn.

If you are provided with an electric van by your employer, you will be taxed on £1,340 for using the van on private journeys, other than commuting. This taxable benefit is likely to rise to around £2,000 for 2019/20, which is considerably less than the taxable benefit for having an electric car.

How to avoid IR35

The tax avoidance rules known as IR35 have been in force since April 2000. They are designed to prevent employers and workers from reducing their tax and NIC bills by placing a company structure between the worker and the employer.

Unfortunately, it is difficult for HMRC to tell whether a small company has been inserted as an artificial step, or whether it is a genuine service business. If you operate through your own personal service company, you may need to prove to HMRC that your company is a genuine independent business and that you aren’t a disguised employee of your customer.

Here are some ways to show you are independent and that you are not caught by the IR35 rules:

  • Work for several different customers, preferably concurrently, but certainly over a year
  • Agree with your customer that you will provide a substitute if you can’t perform the contract personally
  • Provide most or all of your own equipment
  • Correct any faults in your work in your own time and at your own cost
  • Work under your own direction as much as possible
  • Don’t accept benefits which your customer normally provides to its employees
  • Don’t attend social or training events hosted by your customer for its employees
  • Don’t become part of the structure of your customer’s business
  • Don’t become economically dependent on one customer

Do discuss your working arrangements with us if you are concerned that you could be caught by IR35.

RTI late filing penalties

The intended purpose of real time information (RTI) reporting of payroll data is to update universal credit accounts with individuals’ actual pay within days of their pay date. RTI reporting also allows employees to view their latest tax position through their online personal tax accounts.

However, those accounts won’t be up to date if employers don’t report payroll data on time. HMRC should receive the full payment submission (FPS) report on or before the employees’ pay date, and automatic penalties can apply if the RTI reports are submitted late.

The best way to avoid penalties for late RTI reporting is to do your payroll tasks in this order:

  1. Run the payroll
  2. Make the RTI submissions
  3. Pay the employees

Currently the HMRC computer won’t issue a penalty if the RTI submissions are made within three days of the employees’ payday. This temporary grace period isn’t an extension to the deadline; if you consistently file within this three-day window HMRC may write to warn you that a penalty will be issued. You are permitted one late RTI filing in the tax year before a penalty is issued.

If you have had to file an FPS late, get your excuse in early by including the appropriate code letter in the late reporting field in the submission. The code for having a reasonable excuse is “G”.

If you receive a penalty notice which you don’t agree with, you need to appeal against it within 30 days. This can be done by letter or online, and we can help you with that.

Tax relief for clothing

There is an overriding rule when claiming a deduction for the cost of clothing as a self-employed individual; the garment must be wholly and exclusively used for the purpose of your business. This is normally the sticking point with clothes – they are generally needed for warmth and decency, so the “exclusively” part of the condition fails.

However, where the purpose of the clothing is to protect the individual or products, and the items are required to be worn in the work environment, the cost will be tax deductible. This would apply to hard-hats and high visibility jackets worn on building sites, or hairnets and latex gloves in a food factory.

The cost of a uniform required to be worn at work can also be deducted. To qualify as a uniform the items must not be part of your everyday wardrobe, and should be easily identified as a uniform by the logos attached to the items, colour or styling.

Performers who need to wear a costume for their act can claim for the cost of the clothes, make-up, wigs, and shoes used in the performance. However, where such clothing could be worn as everyday wear, such as a business suit, the cost will not be deductible.

If you want to claim for the cost of clothes or footwear you wear at work, you must keep a copy of the receipt (a digital picture is fine), and record why you need the item for your business.

Tax refund claims

You don’t have to wait until the end of the tax year to reclaim any tax you have overpaid. It is now quite simple to do this through your online personal tax account (www.gov.uk/personal-tax-account)

If you are still employed, your PAYE code should be adjusted so you receive your tax repayment as an addition to your next salary payment. However, young people who have worked during the summer to build up savings for university, may no longer have a job through which the tax repayment can be made.

These students may have had too much tax deducted from their wages, as £987 of their personal allowance is set against their salary each month, but over the whole year they may earn less than the full personal allowance of £11,850.

If the student doesn’t plan to earn a wage during the Christmas break, it would be worthwhile claiming a tax refund. This can be done by applying through their online personal tax account, or by calling HMRC. Be sure to note the date and time when calling HMRC, the name of the HMRC adviser, and who said what.

Tax refund claims can be made for the previous four tax years as well. The earliest year you can claim for is now 2014/15.