Just a short Briefing this time –
The first sections concern England and Company Payroll Bureau and New Payment Scheme for VAT deferred from last year
The rest of the briefing is for the attention of VAT Registered clients working in the Construction Industry.
Payroll Bureau – Polite Request
To ensure the smooth running of your Payroll, we would be grateful if all information could be received as per either the templates emailed to you each month, or, if you are independently sending us Furlough information, the exact amount of hours expected to be worked each week/month against how many hours actually were worked each week/month. HMRC demand this information when claims are uploaded. This may mean informing us of part-time employee’s weekly working patterns. We would also request that you let us know at the time of processing if you require any Furlough to be topped up.
As of 1 December 2020, HMRC stopped the benefit of being able to claim Furlough on any Notice period or redundancy payments. However, Furlough claims are still permitted on any eligible employee’s holiday pay, as long as that pay is topped up to their full salary rate. To ensure that these guidelines are adhered to, we will need to know how many days holiday you wish to claim for within each week/month. Please advise us via your wages template or email.
New Payment Scheme for VAT deferred from last year
If you have not yet paid the VAT deferred payments that you were able to delay, from between March and June 2020, you have until 31 March 21 to pay this, OR, you can now opt into a new “payment scheme”, to pay it off over 2 to 11 monthly instalments. How to apply can be found at the following link.
The following part of the Briefing is only applicable to VAT Registered clients working within the Construction Industry
Construction VAT to change on 1 March 2021
We think it is sensible to warn you of major changes to the VAT scheme for construction which HMRC are imposing and will begin on 1 March 2021.
There is much lobbying for it to be delayed, or in fact dismissed altogether – it has been postponed twice already – but if this does not happen you need to be prepared.
The Scheme is called the Construction Industry Scheme VAT Domestic Reverse Charge (CIS DRC)
The change in legislation will affect the payments you make and receive after this date and are allegedly necessary to combat VAT fraud.
It will be the Customer that accounts to HMRC for the suppliers output (sales) VAT.
o The customer accounts for the supplier’s output VAT.
o A reclaim can be made on the same Return if the customer is entitled to recover the VAT.
o The supplier does not charge or collect VAT on its sale.
The change applies to you if you are conducting business to business sales of construction work in the UK. This does not apply where you are dealing directly with only the end customer and they are a private individual.
The published guidance that has been released by HMRC so far is at https://www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services-guidance-note
It is also useful to look at and understand the published guidance on the CIS scheme itself which can be found at www.gov.uk/government/publications/construction-industry-scheme-cis-340
The CIS DRC applies when all the following are met:
· There is a supply for VAT of construction services and materials.
· The supply is made at the standard or reduced rate of VAT.
· The supply is made between a UK VAT registered supplier and UK VAT registered customer.
· Both supplier and customer are registered for the CIS.
· The customer intends to make an ongoing supply of construction services to another party.
· The supplier and customer are not connected.
· The supplier is not an employment business.
· The customer is not an ‘end-user’.
The CIS DRC does not apply to any of the following supplies:
· Supplies of VAT exempt building and construction services.
· Supplies that are not covered by the CIS, unless linked to such a supply.
· Supplies of staff or workers.
· Supplies of materials only.
The CIS DRC does not apply to taxable supplies made to the following customers:
· A non-VAT registered customer.
· A customer who is an ‘end-user’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction.
· A customer who is an ‘intermediary supplier’ and has informed the supplier of this status in writing.
We actually undertook a seminar on this subject in September 2019, just before it was due to be introduced for the first time. We would do the same again if circumstances allowed, however, as that is not possible, we have ‘date amended’ the slides and produced a Guide, which can be found on our website using the link below.
We cannot urge you strongly enough to view the Guide if you work as either a Contractor or Subcontractor in the construction industry.
We can also provide template letters prepared for you to use. They are tailored as to whether you are writing either as a Contractor or a Subcontractor. They were initially provided as attachments to our briefing email, but can be re-issued if needed by contacting us directly.
We hope you can use them in your supply chain to provide clarity for all.
Example: how the CIS reverse charge works
John the Roofer (who is VAT registered) supplies the materials and roofs to a new office building for a Contractor (who is also VAT registered) who, in turn, supplies its construction services to a Developer (also VAT registered). The Developer finds and develops land and will, in this case, bring the build to completion and supply a finished commercial building to Enduser, its client.
· John the Roofer would, under the old VAT system, invoice Contractor £120,000, comprising of his £100,000 bill for materials, labour and works, plus £20,000 in VAT (at 20%).
· From March 2021, under the new CIS reverse charge mechanism, he invoices £100,000. His invoice states that ‘the CIS reverse charge applies’ and that the applicable rate of VAT is 20%.
· Contractor pays John the net £100,000 fee. It then accounts for output and input VAT of £20,000 on the supply on its own VAT Return.
· John does not account for output VAT in his accounting system as he has invoiced only his fee £100,000.
· As a consequence of the reverse charge procedure, John charges and receives £20,000 less than under the old system (where he would charge £100,000 + VAT), however, he does not have to account to HMRC for any output Tax on this transaction.
· When he is paid by the Contractor, he includes the value of the sale in box 6 of his VAT Return. He does not add VAT to box 1 as he receives no output VAT.
· The change may well impact John’s cashflow, as under the old rules, if a Contractor was a prompt payer he could hope that he could use the £20,000 in VAT to purchase his materials. He could then purchase his materials and offset the input Tax paid against his output liability.
· The Contractor has a cashflow advantage, it does not have to pay John £20,000 and then, at the end of its VAT quarter, it cannot reclaim £20,000 as it is accounting for the reverse charge and the output VAT offsets the input VAT.
· As the Contractor is supplying CIS services it must also consider the reverse charge. Will its client (the Developer) be involved in the onward supply of CIS services? In this case, this may be difficult to determine as apparently the Developer is selling a finished building to Enduser, who is an investor, and the reverse charge does not apply. It is the Developer’s responsibility to notify down the supply chain.
If you have any questions regarding this, please call the office and ask to speak to your client manager.