Tax Question Of The Week – Plant Hire & CIS

My client is a contractor in the Construction Industry and has asked for clarification on the following issues regarding plant hire:

  • Should payments for plant hired by my client be included on the contractor’s monthly CIS300 return?
  • Can plant be claimed as materials by subcontractors?

Regulation 4 of SI 2005/2045 requires that monthly returns must be made by contractors including, amongst other things, the amounts of contract payments within s60 FA 2004 and the costs of materials where contract payments are made under tax deduction. It has always been a practical problem with CIS compliance in identifying which payments are within the scheme and so should be included in these returns. In addition, s61 FA 2004 allows the cost of materials to be excluded from the sums on which tax is deducted by the contractor without defining what is meant by materials.  As a result, most advisers will follow HMRC’s guidance on what payments are within the scheme and what constitutes materials.

Should Payments for Plant Hire be Included on the Contractor’s Monthly CIS300 Return?

Of primary importance is to distinguish between the hiring of plant with or without an operator. HMRC has summarised the position in CISR14260 as follows:

When a contractor hires plant from another person, the contractor needs to decide whether or not to apply CIS to the payments.

  • Payments for the hire of plant with an operator for use on site are within the scope of the CIS scheme and therefore, do need to be shown on the contractor’s monthly CIS300 return
  • Payments for the hire of plant without an operator are not within the scope of the CIS scheme and therefore, do not need to be shown on the contractor’s monthly CIS300 return.

Where the plant is scaffolding, HMRC provide separate guidance at CISR14030:

  • Where the contract is to supply and erect/dismantle the scaffolding, all payments under that contract should be included on the contractor’s monthly CIS300 return.
  • If the contract is for supply only (scaffolding hire, with no labour), none of the payments need to be included on the contractor’s monthly CIS300 return.

 

Can the Plant be Claimed as Cost of Materials?   

The direct cost of materials claimed by a subcontractor means what the subcontractor can demonstrate they paid for the materials in carrying out the work under contract.

  • If the subcontractor already owns the plant, it cannot be claimed as materials, as it is not a “direct cost to any other person of materials used or to be used in carrying out the construction operations to which the contract under which the payment is to be made relates” – S61(1) FA 2004. This includes plant already bought under a Hire Purchase Agreement. However, consumable items, for example the cost of fuel required to run/power the plant, may be claimed as materials.
  • If the subcontractor hires the plant from a third party, the cost of the plant hire and any consumable items, for example the cost of fuel required to run/power the plant, may be claimed as materials.

So, if a subcontractor shows plant as materials on their invoice, the contractor should ask whether they own the plant being supplied, or whether they have had to hire it in from a third party.  It is the contractor’s responsibility to check this under regulation 4 of SI2005/2045 (see CISR15060), and to submit complete and accurate CIS300 returns to HMRC.  The contractor may be liable for any tax arising from under-deductions or incomplete returns and be liable to associated interest and penalties.

HMRC will often query plant hire and materials during their compliance checks, and will often request evidence to show that the plant has been hired in from a third party.

HMRC have specific guidance on plant hire as materials in CISR15090 and in paragraph 3.14 of publication CIS340.

VAT Question Of The Week – Lockdown, Turnover and Deregistration

My client is a hairdresser and due to the current Covid-19 pandemic situation, her salon has been closed since mid-March. Prior to that she was VAT registered and significantly above the registration threshold. She has asked whether she can deregister from the beginning of her current VAT quarter, which spans 1.2. 20–30.4.20, as she has had to suspend trading for the foreseeable future until the lockdown measures ease.

 

There is no provision for retrospective deregistration unless the business has actually ceased to trade. In cases where it is the intention that trade will continue, cancellation of registration is only permitted if it can be demonstrated to the satisfaction of HMRC that “the taxable supplies in the period of one year then beginning” will be below the deregistration threshold, which is currently £83,000 (Paragraph 4(1) VATA 1994).

VAT Notice 700/11 Cancelling your registration, states:

“If you’re requesting voluntary VAT registration cancellation on turnover grounds, you’ll need to tell HMRC why you think your turnover is going to fall below the VAT registration cancellation limit. You may, for example, have reduced your opening times, lost contracts, or changed your business practices.”

However, the law prohibits deregistration under the 12 month forward look for a temporary suspension of trade. Paragraph 4(2) states:

“ A person shall not cease to be liable to be registered under this Schedule by virtue of sub-paragraph (1) above if the Commissioners are satisfied that the reason the value of his taxable supplies will not exceed £83,000 is that in the period in question he will cease making taxable supplies, or will suspend making them for a period of 30 days or more.”

In the current circumstances it is difficult to predict how long the lockdown will continue and affect trade and indeed how an enforced closure would be considered in the light of paragraph 4(2). As such it is unclear how HMRC would view a deregistration application on the grounds of future turnover, particularly if the business had been trading above the threshold prior to lockdown. My client would have to provide a monthly breakdown of turnover with a prediction that the period of enforced closure would extrapolate to reduce the turnover to below 83K in the forthcoming 12 months. My may be difficult to prove if a high demand for the client’s services is anticipated once lockdown is eased.

In summary therefore, my client cannot deregister from the beginning of the current period. She will have to account for VAT on takings until the salon closed and apply for deregistration under the 12 month rule if she feels a case can be made. Bear in mind that payments for 04/20 returns can be deferred until 31.3.21 without HMRC approval if wished.

Tax Question Of The Week – Electric Cars

What are the benefit in kind rules for 2020/2021 for low emission cars and fully electric cars provided to employees as company cars?

Fully electric vehicles

 Employees are required to pay income tax on any benefits that they receive from their employer. The benefit in kind for company cars is calculated based on the car’s C02 emissions and the list price of the vehicle.

From 6 April 2020, the benefit in kind for fully electric cars is being reduced to 0% for the tax year 2020/2021. The Government’s summary of responses document published in July 2019 confirmed that:

“All zero-emission company cars will attract a reduced appropriate percentage of:

  • 0% in 2020/21
  • 1% in 2021/22
  • before returning to the planned 2% rate in 2022/23”

These reduced rates are applicable for cars registered before and after 6 April 2020. The July 2019 review can be found at:

https://www.gov.uk/government/publications/review-of-wltp-and-vehicle-taxes

The advance of these reduced rates will reduce the employee’s income tax liability, and save employers on their Class 1A National Insurance liability.

Fully electric cars will not have any fuel scale rate charges applied to them, as electricity is not a fuel. For reimbursement of mileage, you would use the approved electricity rate of 4p per mile. This rate is published under Advisory Fuel Rates on Gov.UK and the latest rates can be found at:

https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016

There are also tax advantages if you provide your employee with charging facilities at your workplace, and even for the installation of a vehicle charging point to be installed at the employee’s home.

For further guidance on the tax treatment of charging and mileage payments due to an employee using a fully electric vehicle, please see the below EIM reference:

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim23900

Ultra-low emission vehicles

If a fully electric car is not available, there are also reduced rates for ultra-low emissions car with CO2 emissions of less than 75g/km.

For cars registered from 6 April 2020 with a range of more than 130 electric range miles, they will also benefit from the reduced appropriate percentage of 0% for the 2020/2021 tax year.

For cars registered before 6 April 2020 with a range of more than 130 electric range miles, they will benefit from the reduced appropriate percentage of 2% for the 2020/2021 tax year.

Employees who are in receipt of an ultra-low emission vehicle as a company car, they are able to have a salary sacrifice arrangement to run alongside the provision of the vehicle. The optional remuneration arrangement rules do not apply to cars with CO2 emissions of 75 grams or less per kilometer. Cars with CO2 emissions of 75 grams or less per kilometer continue to be taxed on the cash equivalent of the benefit without having to make a comparison with the salary foregone.

For further guidance on the tax treatment of charging and mileage payments due to an employee using a fully electric vehicle, please see the below EIM reference:

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim44060

HR Expert – Vegan Employees

My client wants to know if they need to do anything, in particular, to support vegan employees at work?

Veganism seems to have become more widespread in recent years, with a growing number of individuals opting for a plant-based diet free from animal products. Although individuals’ dietary choices may not necessarily be high up on employers’ list of concerns, it is admirable that my client is considering the support they offer to vegan employees in the workplace.

After all, a tribunal judge has recently suggested that that veganism could qualify as a philosophical belief under the Equality Act 2010 in the future, stating their opinion that the belief consisted of ‘clear cogency and cohesion’. Under the Act, a philosophical belief will receive protection so long as it is genuinely held, is about a substantial aspect of human behaviour and is worthy of respect in a democratic society. Because of this, it may be that, in the future, individuals are protected from discrimination and harassment that is based on their veganism.

Therefore, to ensure that my client’s workplace remains inclusive for vegans, some thought is required. For example, as vegans abstain from the consumption of animal products, your client should pay close attention to the food on offer in any staff canteen or pre-arranged business lunch, ensuring there are always vegan options available.

My client should reconsider if any dress codes require vegans to wear items made from animal products, such shoes or belts made of leather, as doing so could potentially place them at a disadvantage. If so, my client should consider the materials used in uniforms and ensure that they do not pose a problem for vegan employees.

Specific tasks allocated to vegan employees may need to be adjusted if it would make the employee feel uncomfortable. For example, asking a vegan to design a marketing campaign for a butchers shop may not be appropriate.

As with all protected characteristics, employers should have a zero tolerance stance towards bullying and harassment of vegans and deal with any complaints swiftly and seriously. Anti-harassment training should be conducted by all employers to ensure employees are aware of what counts as unacceptable behaviour.

Overall, my client should look to create an inclusive workplace that does not marginalise any employee, regardless of their beliefs. By following this approach, they will reduce the likelihood of any issues occurring relating to veganism and allow staff to continue to perform at their best, without feeling hard done to at work.

HR EXPERT: Government Pledge Living Wage Increase

Whilst some employers may have been surprised by the Government’s announcement to increase the National Living Wage, it is important that my client understands that it will not be taking place immediately. A phased approach will be used to implement higher rates over the course of the next 5 years. This was the pledge made by Chancellor Sajid Javid at the recent Conservative party conference.

In his statement, Javid promised that the NLW, which is the minimum hourly rate currently payable to workers aged 25 and over, will rise from its current hourly rate of £8.21 to £10.50. This will equate to a 27% increase in the hourly rate of those receiving NLW.

Whilst increases to the NLW are not particularly big news considering they normally happen every year, it was the second part of the Chancellor’s announcement that my client is less likely to have been prepared for. Thousands more younger workers will be entitled to receive the higher rate; it will apply to all those aged 21 and over. Again this will be phased in, with a drop from 25 to 23 in 2021 and a further drop to 21 from 2024.

From my client’s perspective, the good news is that they will have a significant amount of time to prepare for this change in minimum wage law and ensure provisions are in place to ensure staff continue to be paid the correct rate.

Another positive is that the removal of the separate 21-24 year old age band may make the system easier for my client to understand. After all, recent statistics released by the TUC suggest employers struggle to comply with the minimum wage rights of those aged 25 and under. Therefore, this should reduce the likelihood of pay discrepancies from occurring as all staff aged 21 and over will be entitled to receive the same minimum rate.

However, the fact is that my client will still face the prospect of paying staff more money, which is likely to have an impact their budget and operational costs. If my client is concerned about the prospect of paying higher salaries, they may consider offsetting this cost by reducing outgoings in other areas which could include the size of the workforce, the location of the work or other supplier costs, for example.

In addition, if my client already pays staff above the hourly NLW as part of a competitive employee benefits package then they may need to increase this accordingly in order to retain their competitiveness.

VAT Question Of The Week – COVID19: VAT Implications of Donated Goods

My limited company client’s normal business activity is the design, build and installation of seasonal in-store displays for retailers. They are unable to work in this field because of the Covid-19 restrictions. They are considering using their staff and resources, with support from crowd funding, to manufacture visors which would be gifted to the NHS. The visors will show the company logo. Will VAT need to be accounted for on the crowd-funded income? Will there be any input tax restriction in relation to the costs of producing the gifted items? The company has also applied for a Covid-19 business support grant; how should they treat this income if they get it?

VAT Act 1994. Section 4, is the legislation which provides the points to be consider in deciding whether a transaction falls within the scope of VAT,

4(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
4(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”

Section 5 goes on to provide that for there to be a supply of goods or services, there needs to be “consideration”. This can be in the form of money or indeed barter where the customer itself supplies goods or services to the supplier as payment.

In this case my client has two forms of income to consider: the crowdfunding and the Covid-19 Grant. In both instances my client is receiving income but in neither case is there a supply of goods or services to the person making the payment; neither the grant nor the crowdfunding income is within the scope of VAT. Please see last week’s VQOTW for more on the receipt of grants and when they may be consideration for a supply.

https://www.cronertaxwise.com/community/vqotw-covid-19-small-business-grants/

The visors produced will be donated to the NHS. It is possible to see the costs incurred in producing the visors in 2 different ways: –

The first is that the costs incurred have no business purpose. Strictly speaking entitlement to VAT recovery depends on the application of that cost to a taxable business purpose; thus, non-business activity could be seen to restrict recovery of input tax on both the directly related costs, and a proportion of overheads.

The second, and arguably more reasonable, way to see this is that the equipment is being given away as business gifts. The business logo is being shown on the visor, and while not the primary rider, this will show the business in a good light. Under business gift rules, input tax is recoverable in full, and if the total cost to the supplier of all the gifts to one person does not exceed £50 in any 12-month period there is no requirement to account for output tax. Output tax on the cost value of the gifts will be required to be accounted for if the cost of gifts to one person does exceed £50 in any 12-month period. See VAT Notice 700/7: Business Promotions, section 2 for full details. However, providing the NHS with a tax certificate (similar to a VAT invoice) may enable that VAT to be recovered by the NHS (700/7 paragraph 2.4).
HMRC have not, to date , provided any guidance on PPE products being given away in such circumstances, but it seems likely that they will take a pragmatic view of the recovery of related input tax.
If the NHS was receiving donated funds, and then purchasing the items using those funds, the supply of the goods would be zero rated under Schedule 8, Group 15, Item 5. Similarly, if my client personally raised the funds and then purchased the goods from the company to donate to the NHS the sale by the company to your client would be zero rated. Notice 701/6 provides detail on the supply of equipment for medical use and paid for by a charity or using donated funds.

 

Tax Question Of The Week – Self-Employment Income Support Scheme (SEISS) Grant

What happens if my sole trade made a loss in the 18/19 tax year will I still get access to the Self-employment Income Support Scheme (SEISS) grant?

The amount of grant that HMRC will pay to those claiming the SEISS is based on the average yearly trading profit in the 16/17, 17/18 and 18/19 tax years. The amount received will be 80% of the monthly average of the above up to a maximum of £2500 per month.

A loss making year will be treated as a year of negative profits rather than a year of zero profits for the purposes of the SEISS. This means the loss must be deducted from your profits in the period rather than treated as zero profits as it is until the losses are used.

Neither a brought forward loss nor the personal allowance will be deducted from the profits.

Please see the example below.

A sole trader has the following profits and losses for the 3 years and more than 50% of their income stems from self-employment.

  • £45,000 profit in tax year 2016/2017
  • £60,000 profit in tax year 2017/2018
  • £20,000 loss in tax year 2018/2019

First, add £45,000 and £60,000 then deduct £20,000 loss. This gives us a total of £85,000 and dividing this by 3 this gives us an average of £28,333. 80% of this would be £22,666.

The grant will be the LOWER of 80% of the average trading profit (here £1,889 which is £22,666/12) or £2,500 per month. Here the grant would be £1,889 per month as it is lower than £2,500 per month.

If the trade only commenced in the 17/18 or 18/19 years the average profits would be divided by the number of years of trading rather than by 3 years.

To be eligible for the SEISS grant, the self-employed profits must be no more than £50,000 but more than 50% of total taxable income for either:

  • The tax year 2018/19, or
  • The average of the tax years 2016/17, 2017/18 and 2018/19.

When applying the averaging test, trade losses are taken into account and the other personal income is also averaged.

Tax Question of the Week – SDLT & Residential Property

My client is a company and the directors of the company are contemplating buying a property for £1M from the same vendor which consists of a dwelling and garden, stables, sheds and 10 acres of agricultural land. Should the acquisition be treated as “mixed use” and the tax chargeable in respect of the transaction be determined in accordance with non-residential or mixed used rates of SDLT?

There has been recent coverage in the tax press concerning what is “residential property” for SDLT purposes. In addition, HMRC have updated their guidance to publish their own views on residential property (see SDLTM00210 and specifically SDLTM00360 to SDLTM00480).There has also been a recent First Tier Tribunal case determining that a residence with substantial grounds was wholly residential property (Hyman v HMRC UKFTT 469). This definition is important as it affects the rates of SDLT payable under s55 FA 2003 i.e. the higher residential rates or the lower “non-residential or mixed” rates. In addition, if residential property is being acquired, the additional 3% rate may apply under Schedule 4ZA FA 2003.

However, when a company acquires an interest in land which includes a residential property, it is often forgotten that there is a separate rule in Schedule 4A FA 2003 which may result in a flat rate 15% SDLT charge. This is sometimes referred to as “ATED related SDLT” as a company which is within the scope of Sch. 4A will inevitably have to register for ATED purposes. Under this rule, even if the acquisition is “mixed use”, a just and reasonable apportionment is required to identify the residential property interest being acquired. If the residential property interest (the “higher threshold interest”) is £500,000 or more the 15% SDLT rate will apply unless one of the exclusions in paragraph 5 Sch. 4A apply (businesses of letting, trading in or redeveloping properties) which follow the ATED charge exclusions. HMRC’s guidance is at SDLTM09500.

Therefore, whether the property interest being acquired is “residential property” or “mixed use property” does not in itself determine the amount of the SDLT payable. Firstly a review of the interest being acquired by your client company is required to decide whether or not the entirety is wholly residential property or mixed use property. Unfortunately this cannot be established from the limited information provided. Secondly consideration needs to be given to whether the Sch. 4A charge applies.

Relief from the Sch. 4A charge is given by a claim on the SDLT Return which is generally prepared by the solicitor dealing with the property acquisition. Therefore you will have to liaise with the solicitor before the SDLT Return is filed if you want to be involved with the decision making process.

Tax Question of the Week – Duty to Deduct Tax

I have a company client and they have taken a number of loans in recent years that remain outstanding, business is improving and the company is going to start paying interest on those loans. They have a mixture of loans; one from the director, one from a UK company and one from a company abroad.

My question is: Does the company have to deduct tax before making the interest payments?

The duty to deduct tax in respect of interest payments will differ in each of the 3 scenarios so let’s have a look at each in turn.

The relevant legislation is contained within the Income Tax Act of 2007 (“ITA 2007”).

The duty to deduct basic rate (20%) income tax is set out in Section 874 ITA 2007 and imposes the duty to deduct income tax on ‘yearly’ interest paid in certain circumstances. There is no statutory definition of the term ‘yearly’ however, a useful discussion of the term can be found in various HMRC manuals. Please see INTM413210 and SAIM9075.

In our first scenario, where the company is paying interest to an individual. The company will have to deduct basic rate tax and it will also have to complete and submit form CT61 within 14 days of the end of the quarter return period. Further guidance can be found here.

In the second scenario where the company is paying another UK resident company, the payment can be made gross of tax as prescribed by Section 933 ITA 2007. Further guidance can be found here, CTM47540. It is worth noting that the guidance sets out an exception to this rule, for example when the person receiving the interest is only acting in the capacity of a nominee.

The third scenario involves a payment to a non-resident company. The basic position is that tax would need to be deducted at the basic rate. However, it is possible for a double taxation agreement (DTA) to override this basic position. That is to say that the obligation can be changed or removed where both a claim is made and the DTA allows for this. Often a DTA will allow for a reduced rate of tax to applied. The actual rate will vary country to country.

There is a requirement to make a claim, the treaty rate cannot simply be applied automatically. As the recipient is a non-resident company the claim is made via a form; ‘DT Company” which can be found here.

Alternatively, It is possible for a non-resident company to register for the Double Taxation Treaty Passport (DTTP) Scheme and then it would then be possible for the UK company to apply the treaty rate without the need to make an application.

Each DTA will bring its own peculiarities and the situation is a little more complex in respect of royalties. As such, we would ask that you call us to discuss these aspects further.

Finally, it is worth noting that the UK does not withhold tax in respect of dividends.

VAT Question Of The Week – Retained Deposits Following the Cancellation of Supplies

My client is a limited company running a soft play centre and amongst many other things, is worried about the impact of Coronavirus on their VAT obligations. Several customers have already decided to forego their deposits and cancel birthday parties, and the book-keeper has had to self-isolate for 14 days. What does the client need to do about the VAT already paid over to HMRC for the deposits, and what should they do if they are concerned that they may not be able to submit their VAT return, or make the payment on time?

Until 1 March 2019, HMRC allowed businesses to treat retained deposits for cancelled supplies as compensation and therefore outside the scope of VAT, as long as the customer hadn’t used the service, or collected the goods.

However in 2018 HMRC reviewed its policy following judgements by the Court of Justice of the European Union (CJEU), and issued Revenue and Customs Brief 13 (2018) confirming that the policy was to change with effect from 1 March 2019.

This means that where a deposit is paid towards the balance of supply, and the supply is subsequently cancelled, the deposit paid cannot later be reclassified as compensation, and remains payment for a supply, albeit that supply is now unfulfilled. This means my client cannot make any VAT adjustments on deposits for unfulfilled supplies unless the deposit itself is refunded to the customer.

Regarding my client’s worry about their ability to file returns and pay on time, The Chancellor recently announced that HMRC has set up a dedicated helpline serviced by an extra 2,000 staff, for businesses who may be struggling to submit returns on time because of isolation issues, or struggling to pay because of a downturn in business. You should contact HMRC as soon as you become aware of a potential issue on their dedicated helpline which is 0800 0159 559.

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