Making Tax Digital for Business: VAT
HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. Regulations have now been issued which set out the requirements for MTD for VAT. Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.
The new rules have effect from 1 April 2019 where a taxpayer has a ‘prescribed accounting period’ which begins on that date, or otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019. HMRC has recently announced that the rules will have effect for some VAT-registered businesses with more complex requirements from 1 October 2019. Included in the deferred start date category are VAT divisions, VAT groups and businesses using the annual accounting scheme.
HMRC has recently opened a pilot service for businesses with straightforward affairs and the pilot scheme will be gradually extended for other businesses in the next few months.
Keeping digital records and making quarterly updates will not be mandatory for taxes other than VAT before April 2020.
Keeping digital records will not mean businesses are mandated to use digital invoices and receipts but rather the actual recording of supplies made and received must be digital. It is likely that third party commercial software will be required. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements. It should be noted that MTD isn’t just about having compatible software, a compatible process is also required as ultimately the VAT return will need to be automated by the software or spreadsheet with no manual transfer of data.
More information is available here.
Corporation tax rates
Corporation tax rates have already been enacted for periods up to 31 March 2021.
The main rate of corporation tax is currently 19% and will remain at this rate for next year. The rate will fall to 17% for the Financial Year beginning on 1 April 2020.
Class 2 and 4 National Insurance contributions (NICs)
The government has recently announced that Class 2 NICs will not be abolished for the duration of this Parliament. The Chancellor confirmed in March 2017 that there will be no increases to Class 4 NICs rates in this Parliament.
The government’s proposed reform of Class 2 and 4 NICs has had a chequered history. The original proposal was to abolish Class 2 contributions and reform Class 4 contributions. The Chancellor had to backtrack on the Class 4 reform due to the reaction to a proposed increase in rates and the Class 2 abolition was deferred to April 2019. However a significant number of self-employed individuals with the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially and so the government decided it would not be right to proceed with the abolition of Class 2.
UK property income of non-UK resident companies
Changes are made for non-UK resident companies that carry on a UK property business either directly or indirectly, for example, through a partnership or a transparent collective investment vehicle.
Following consultation, from 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present.
Annual Investment Allowance
The government has announced an increase in the Annual Investment Allowance for two years to £1 million in relation to qualifying expenditure incurred from 1 January 2019. Complex calculations may apply to accounting periods which straddle this date.
Despite the Government previously having said there was no change on the horizon when fixing the Annual Investment Allowance limit at £200k in 2016, the increase in the Annual Investment Allowance to £1 million has been welcomed. That said, this is unlikely to have a major impact, as the majority of SMEs would not normally spend in excess of the current limits. The significant majority of businesses can now claim full relief on their capital purchases in year.
A number of changes are made to other rules relating to capital allowances:
- a reduction in the rate of writing down allowance on the special rate pool of plant and machinery, including long-life assets, thermal insulation, integral features and expenditure on cars with CO2 emissions of more than 110g/km, from 8% to 6% from April 2019. Complex calculations may apply to accounting periods which straddle this date
- clarification as to precisely which costs of altering land for the purposes of installing qualifying plant or machinery qualify for capital allowances, for claims on or after 29 October 2018
- the end of the 100% first year allowance and first year tax credits for products on the Energy Technology List and Water Technology List from April 2020
- an extension of the current 100% first year allowance for expenditure incurred on electric charge-point equipment until 2023.
In addition, a new capital allowances regime will be introduced for structures and buildings. It will be known as the Structures and Buildings Allowance and will apply to new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2% on a straight-line basis.
A further note of interest concerns the end of the 100% first year allowances on energy efficient and water efficient technologies from April 2020 (i.e. an energy efficient boiler, or a water efficient, auto-shut off shower for example) our recommendations to businesses would be if considering buying any energy efficient equipment in order to take full advantage of this relief is to do so sooner rather than later.
Change to the definition of permanent establishment
A non-resident company is liable to corporation tax only if it has a permanent establishment in the UK. Certain preparatory or auxiliary activities, such as storing the company’s own products, purchasing goods or collecting information for the non-resident company, are classed as not creating a permanent establishment.
From 1 January 2019, the exemption will be denied to these activities if they are part of a ‘fragmented business operation’
Change in the definition of “permanent establishment” for companies, which could mean that more profits will become chargeable to corporation tax
Preventing abuse of the R&D tax relief for SMEs
To help prevent abuse of the Research and Development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total PAYE and NICs liability from April 2020.
HMRC has identified and prevented £300 million of fraud linked to this relief and this change will help to address similar abuses in future. Almost 95% of companies currently claiming the payable credit will be unaffected.
Protecting taxes in insolvency
From April 2020, HMRC will have greater priority to recover taxes paid by employees and customers.
The changes appear to be mainly targeted at the distribution of funds to financial institutions as creditors. The rules will remain unchanged for taxes owed by the business and HMRC will remain below other preferential creditors such as the Redundancy Payment Service.
The rules will remain unchanged for taxes owed by businesses themselves such as corporation tax and employer NICs.
This demonstrates the Government’s continuing intention to improve year on year the amount recovered in respect of unpaid tax. To date £185m of tax has been recovered in this way. A veiled comment also suggests that, at some stage in the future, directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency
- Changes to the tax treatment of corporate capital losses from 1 April 2020 to restrict the proportion of annual capital gains that can be relieved by brought-forward capital losses to 50%.
- Changes to the Diverted Profits Tax from 29 October 2018.
- An increase in the small trading tax exemption limits for charities from April 2019 from £5,000 per annum or, if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000, to £8,000 and £80,000 respectively.
- The introduction of an income tax charge to amounts received in a low tax jurisdiction in respect of intangible property, to the extent that those amounts are referable to the sale of goods or services in the UK, from 6 April 2019, with targeted anti-avoidance rules for arrangements entered into on or after 29 October 2018.
Digital Services Tax
The government remains committed to reform of the international corporate tax framework for digital businesses. However, pending global reform, interim action is needed to ensure the corporate tax system is sustainable and fair across different types of businesses.
Therefore, the government has announced that it will introduce a Digital Services Tax (DST) which will raise £1.5 billion over four years from April 2020. The DST will apply a 2% tax on the revenues of search engines, social media platforms and online marketplaces where their revenues are linked to the participation of UK users.
Businesses will need to generate revenues of at least £500 million globally to become taxable under the DST. The first £25 million of relevant UK revenues are also not taxable.
The new digital services tax and the business rates relief are a step towards levelling the playing field between online retailers and the high street. But a very minor one. The gap between the internet and the high street is widening week on week. The challenge for the Government going forward is working out how to tax businesses in the digital economy in an increasing technological world.
Intangible fixed assets
The Intangible Fixed Assets regime, which was introduced from 1 April 2002, fundamentally changed the way the UK corporation tax system treats intangible fixed assets (such as copyrights, patents and goodwill). As the regime is now more than 15 years old, the government would like to examine whether there is scope for reforms that would simplify it and make it more effective in supporting economic growth.
Following a short consultation, the government will seek to introduce targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property from April 2019.
With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more
closely align with the equivalent rules elsewhere in the tax code.
VAT registration limits
The government had previously announced that the VAT registration and deregistration thresholds would be frozen at £85,000 and £83,000 respectively until April 2020.
The government has now announced that this freeze will continue for a further two years from 1 April 2020.
The VAT registration threshold remaining at £85,000 will be a relief to many small businesses due to the financial and administrative burden of complying with VAT. With Making Tax Digital for VAT less than six months away a reduction in the threshold would have brought a number of businesses that were not impacted by these changes within the scope of the new rules with little time to prepare. Therefore the threshold remaining at £85,000 is a good result.
VAT fraud in labour provision in the construction sector
The government will pursue legislation to shift responsibility for paying VAT along the supply chain with the introduction of a domestic VAT reverse charge for supplies of construction services with effect from 1 October 2019. The long lead-in time reflects the government’s commitment to give businesses adequate time to prepare for the changes.
For further detail about the reverse charge in the construction industry please see here.
VAT treatment of vouchers
Draft legislation has been issued to amend the VAT treatment of vouchers. The legislation separates vouchers with a single purpose (eg a traditional book token) from the more complex gift vouchers and sets out how and when VAT should be accounted for in each case. The new legislation is not concerned with the scope of VAT and whether VAT is due, but with the question of when VAT is due and, in the case of multi-purpose vouchers, the consideration upon which any VAT is payable.
The definition of single purpose voucher is much wider under the new legislation and businesses should review the vouchers they issue to consider whether they now fall to be a single purpose voucher.
For further information about the new voucher rules please see here.
VAT collection - split payment
The government wants to combat online VAT fraud by harnessing new technology and is consulting on VAT split payment. This will utilise payments industry technology to collect VAT on online sales and transfer it directly to HMRC. In the government’s view this would significantly reduce the challenge of enforcing online seller compliance and offer a simplification for business.