Category: Accountancy

Construction Industry Scheme (CIS) and the Domestic Reverse Charge

Under the Construction Industry Scheme (CIS), a contractor deducts money due to a subcontractor and instead pays it to HM Revenue and Customs (HMRC). This deduction counts as an advance payment towards the subcontractor’s tax. The amount deducted is a percentage of the labour services provided. The Domestic VAT Reverse Charge is in addition to but separate from CIS tax.

VAT – Domestic Reverse Charge
To ensure VAT is reported correctly by businesses in the construction sector, the domestic reverse charge has been added to the existing CIS since 1 March 2021. Prior to 1 March 2021 the supplier (subcontractor) would charge VAT to the customer (contractor), collect it and pay it to HMRC. The contractor would reclaim the VAT amount paid in their VAT return. From 1 March 2021, the subcontractor must not charge VAT but instead specify that the reverse charge applies. The subcontractor then accounts for the contractor’s output tax and reclaims the exact same amount as input tax on the VAT return. The subcontractor effectively accounts for the VAT directly to HMRC, as opposed to paying it over to the contractor.

The reverse charge must be used for most supplies of building and construction services. Normally if any of the services in a supply are subject to the reverse charge, all other services supplied will also be subject to it. The charge applies to standard VAT services for businesses who are registered for VAT in the UK and in the kinds of construction work listed here. Even if a customer enters into 2 separate labour and materials contracts with the same supplier for works within the scope of CIS and the works are to be provided at the same time on the same site, the reverse charge will apply to both contracts (subject to the 5% disregard) as they comprise a single supply for VAT purposes.

If you supply building and construction services as a sub-contractor
You must use the reverse charge from 1 March 2021, if you’re VAT registered in the UK, supply building and construction industry services and:

  • your customer is registered for VAT in the UK (check if your customer has a valid VAT number)
  • payment for the supply is reported within the CIS (use the CIS online service to check your customer’s registration)
  • the services you supply are standard or reduced rated
  • your customer has not given written confirmation that they are an end user or intermediary supplier (an end user is someone who does not make onward supplies of the CIS services supplied to them)

If the above applies, you will not charge VAT to your customer, and they will account for the VAT themselves. You should not charge VAT on the invoice but specify that the reverse charge rule applies. Page 8 of this guidance shows an invoice template.

If you buy building and construction services as a contractor
You must use the reverse charge from 1 March 2021 if you’re VAT registered in the UK, buy building and construction industry services and:

  • payment for the supply is reported within the CIS
  • the supply is standard or reduced rated (check if your supplier has a valid VAT number)
  • you’re not using the end user or intermediary exclusions

If the above applies, you must ensure that your supplier does not charge you VAT (and you do not pay VAT to your supplier), as you should instead account for VAT using the domestic reverse charge procedure.

Settling with HMRC
A contractor must register for the scheme. CIS deductions made will be added to PAYE liabilities.

A registered subcontractor will have 20% deducted from its payments, whereas an unregistered subcontractor will suffer a 30% deduction. A contractor and subcontractor must register as both. Each time tax is withheld from payment to a subcontractor, the subcontractor must be presented with a CIS Payment and Deduction Statement from the contractor. This is used to reclaim tax from HMRC.

A sole trader or partners subtract CIS deductions suffered against income tax and national insurance on the Self-Assessment Tax Return. A limited company subcontractor offsets CIS deductions suffered against PAYE payroll liability. Unrelieved CIS tax deductions at the end of the tax year can be refunded into a bank account or offset against other outstanding tax liabilities, in which case an online form needs to be submitted. A subcontractor who meets the revenue thresholds and has a record of timely tax payments can apply for gross payment status, meaning that they will be paid in full by contractors, without deductions.

Our tech-enabled CIS and payroll service will help:

  1. Advise on your optimal business structure
  2. Ensure that you remain compliant and avoid the many pitfalls
  3. Onboard you to a cloud invoicing facility, with customised invoice templates for each customer or supplier
  4. Email deduction statements directly to your subcontractors
  5. Pay your subcontractors directly using our highly secure cloud payroll + payment integration

Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Automate Salary Payments

You may be all-too-familiar with the process and time spent dealing with payroll and HR: emails, telephone calls, attachments, more emails to employees, setting up bank payments…the list goes on. Large businesses will have segregated duties, with an HR lead responsible for managing joiners and leavers and holiday requests, an Operations Manager for coordinating and communicating shifts, a Payroll Manager and a Financial Controller. For small-to-medium sized businesses, the responsibility often lies with the managing director. In this regard, there are some fantastic tools to make managing your team more pleasant and more efficient, including the new way to automate salary payments.

Paying salaries
The latest integration to the cloud payroll ecosystem automates the payment of staff salaries. Currently, we prepare a BACS payment file which many employers upload to their online banking facility for processing onwards payments. The latest payments platform goes a significant step further and allows us as your accountants to make payroll payments, linked to your payroll information, shortly after the payroll is approved, saving you precious time, removing manual processes, and eliminating costly errors. The seamless workflow is protected by two factor authentication and payments are processed through a highly secure and compliant network. This solution benefits all employers with a high headcount and who pay their staff via bank transfer.

Employer and Employee Portal
By integrating with our payroll software in the cloud, we can streamline the way you communicate payroll information to us, including hours worked, holiday days taken, bonuses or new starters. A browser- or app-based Employer Portal allows you to enter relevant information, store and organise documentation (including payroll reports which we prepare) and make final approvals. We can email your employees their payslips directly, or even grant them access to the Employee Portal, where they can retrieve payslips (including past payslips), submit holiday requests, enter starter data…etc. This functionality benefits businesses in all sectors, as it is centred around improving the information flow between the employer, the employees and the accountant.

Rota Management
If your business requires organising shift patterns for your staff, we can help you implement software which helps you schedule rotas, optimise wage spend, record attendance and approve timesheets for payroll. Your employees would receive pop-up notifications and would log their check-in and check-out times in the app. The app can then produce weekly reports showing hours worked and wages due. There are also built in features such as overtime pay and GPS, which would ensure that employees can only log in when actually present. We have found this software to be particularly helpfuly for hospitality businesses and beauty salons.

How much does it all cost?
The payment integration and cloud hosting is priced based on the number of active employees, and the efficiency saving will tend to outweigh the fee for a payroll with at least 4 employees.

Our Information Sheet sets out a full list of our integrated Payroll and Pensions services.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Professional Services Firm: LLP or LTD

We are often asked to advise our Professional Services clients, lawyers and accountants, on the optimal business structure: LLP or limited company (LTD).

Whilst the statutory and accounting filing requirements are similar across both structures, the LLP was introduced to offer flexibility in management and pay: both important in human-capital-intensive Professional Services Firms. An LLP is controlled by its Members and governed by the Members Agreement, whilst a company is controlled by its shareholders under the articles of association and shareholders’ agreement.

Soon after their introduction, LLPs became the go-to model for Professional Services Firms because of the ability to:

  1. split partnership profits between Individual Members, taxed at income tax rates, to reflect profit or performance targets;
  2. appoint a Corporate Member to absorb “excess partnership profits” in a given financial year, taxed at a lower (corporation) rate of tax and available for reinvestment in the business;
  3. appoint and remove partners without the complex process and costs of them conferring or relinquishing shareholdings, and without the tax costs were any shares obtained at undervalue.

Tax

We know that LLPs are tax transparent and that Individual Members are usually treated as self-employed and taxed at income tax rates, subject to HMRC tests. On the contrary, a company pays corporation tax on profits: a company’s directors receive salaries subjected to PAYE whilst its shareholders pay income tax on dividends voted by the directors.

Some of the benefits of an LLP therefore centre around the following:

  1. An Individual Member of a trading LLP is taxed as if they are carrying on a trade directly for income tax purposes. This treatment carries certain tax advantages compared to the treatment of employees:
    1. Expenses are generally deductible for tax purposes if they are wholly and exclusively incurred for the purposes of the trade. This is in comparison to wholly, exclusively and necessarily incurred for employees.
    2. Pay as you earn (PAYE) does not apply and tax is generally only payable twice yearly rather than monthly as the individual members are not employees.
    3. Employer national insurance contributions (NICs) (currently 13.8%) are not payable in respect of the amounts payable to the individual members of the LLP as they are not employees.
  2. Members can flexibly adjust how the LLP is governed as Members arrive and leave and how Members are remunerated.

Pre-2014: LLP the way to be

Previously and in accordance with a Profit Sharing Agreement (part of the Members Agreement), LLPs enjoyed the ability to apportion taxable profits between Individual Members and Corporate Members, who pay contrasting rates of tax (sometimes 45% vs 19%). LLPs proved to be an effective structure for the governance of a Professional Services Firm, whilst also offering a “hybrid model” of taxation, whereby Individual Members were taxed at income tax rates on income drawn and presumably spent, whilst Corporate Members were taxed at a lower corporation tax rate on excess profits retained for capital expansion of the business.

Post-2014: LLP attack

The mixed membership partnerships anti-avoidance legislation of Finance Bill 2014 brought about a significant change in partnership taxation. Leading up to the change in law, it had become relatively common to see partnerships (including LLPs) with mixed Individual and Corporate Members. In short, the legislation provided for profits allocated to a non-individual partner (B) in a mixed member partnership to be reallocated to an individual partner (A), such that they are taxed at the individual partner’s rate of tax, if either:

  1. Condition X: it is reasonable to suppose that:
    1. B’s profit share includes an amount representing A’s deferred profit; and
    2. A’s profit share and the total amount of tax for which A and B are liable (relevant tax amount) are lower than they would have been absent the deferred profit arrangements.
  2. Condition Y: B’s profit share exceeds the appropriate notional profit, A has the power to enjoy B’s profit share and it is reasonable to suppose that:
    1. B’s profit share (or part of it) is attributable to A’s power to enjoy; and
    2. A’s profit share and the relevant tax amount are lower than they would have been absent A’s power to enjoy in B’s profit share.

Almost overnight, the mixed membership partnership rules led to a decrease in the popularity in the use of LLPs with Corporate Member structures amongst the SME business community and in some cases the unwinding of existing LLP structures.

ITTOIA/S863G

The mixed membership partnerships anti-avoidance legislation of Finance Bill 2014 must be worked through in tandem with HMRC guidance regarding salaried members, which could have significant implications for members of limited liability partnerships.

The rules outline three conditions (A, B, and C) that are designed to determine when an individual should be treated as behaving more like an employee rather than a partner. These rules apply only when all three conditions are satisfied.

  • Condition A: At least 80% of the payment made by the LLP for the individual’s services is expected to be ‘disguised salary.’ This means the payment is not linked to the overall profits or losses of the LLP.
  • Condition B: The individual does not have significant influence over the LLP’s affairs. While HMRC traditionally interpreted this as requiring managerial influence over the entire LLP, recent legal cases suggest a broader interpretation is possible.
  • Condition C: The individual’s capital contribution to the LLP is less than 25% of the expected ‘disguised salary’ for the tax year.

The rules include anti-avoidance measures, the most notable of which mandates that any arrangements primarily designed to prevent the salaried member rules from applying must be disregarded (s863G(1), ITTOIA 2005).

Recently however, HMRC updated its guidance on these anti-avoidance provisions, adopting a stricter interpretation. In the latest version of PM259310, HMRC’s previous comment to the effect that a ‘genuine contribution’ would not trigger the anti-avoidance provision has now been qualified to be dependent on the contribution’s “main purpose (or a main purpose of any arrangement of which it forms part) not being to secure that the salaried members rules do not apply to the individual”.

Action

For mixed partnerships, the following steps could be considered:

  • Outright incorporation. This clearly removes the issue of reallocation and provides a deferral of higher tax rates while the company retains the profits.
  • Eliminate the corporate members and accept the income tax result. This in effect concedes the full impact of the new rules, so could be combined with exploring other approaches.
  • Establish a company owned by the partnership to operate the business with or without the capital assets, ie the corporate is a subsidiary, not a partner. This may provide a possible solution in allowing ownership to change in a partnership rather than a share capital company, but with suitable profit retention for working capital by the operating company.
  • Retain the existing structure with corporate members’ shares in amounts that can be justified by the new rules for services or the provision of capital.
  • Consider the use of alternative business structures which should not result in reallocations between partners. These require specialist consideration by reference to the case and a range of other relevant legislation.

Clearly the tax effects of making a change will need full review, such as the availability of incorporation relief from capital gains tax, stamp duty land tax, and the impact of entrepreneurs’ relief. You can rely on our expertise surrounding companies, partnerships and tax for the delivery of the sound ideas needed to put plans into action:

  • We help businesses manage all aspects of structure from set-up and management to dispute resolution and exit strategies
  • We look at tax structures
  • We understand the differences in structure between a partnership and a company;
  • We advise on adapting a structure that is no longer fit for purpose.

Contact Mouktaris & Co Chartered Accountants for help planning your Professional Services Firm expansion.

Accountant’s Report for Estate and Letting Agents

NALS rebrands as Safeagent

As of the 17th May 2019 the National Approved Letting Scheme (NALS), the UK’s leading accreditation scheme for lettings and management agents operating in the private rented sector, rebranded as Safeagent. Previously NALS and Safeagent were two separate brands. Safeagent, with the assistance of NALS since 2011, was focused on achieving mandatory Client Money Protection (CMP) for all lettings and management agents. NALS was an independent, not-for-profit accreditation scheme for agents, which has been operating for 20 years. Given that NALS and Safeagent shared the same goal of consumer protection, the decision was taken to merge the two brands, and trade under the one Safeagent name.

To become accredited with Safeagent, a firm must comply with the 4 Safeagent client accounting standards:

  1. Maintain separate client accounts.
  2. Withdraw from client accounts only under certain circumstances outlined by Safeagent.
  3. Record Keeping: maintain proper internal accounts showing the up-to-date position in relation to standards 1 and 2.
  4. Reporting: provide a declaration by an accountant confirming that the firm has bookkeeping procedures in place for handing clients’ money.

Mouktaris & Co have experience in helping clients with the regulatory, accounting and tax matters of property investment, sales and lettings. Our team can review your information system and records in order to produce reports required under the Association of Residential Letting Agents (ARLA) Byelaws, the Estate Agents (Accounts) Regulations 1981 (EAAR) and the National Association of Estate Agents (NAEA). We can also provide reports required for Safeagent, RICS and ARMA regulated firms.

Contact Mouktaris & Co Chartered Accountants to find out the many other ways we can help your business, including bookkeeping services, management accounts and advice on internal controls.

The taxation of Cryptocurrency profits is not so virtual

Cryptocurrency investors navigating 100% price swings and exchanges with generous down-time have, this tax season, encountered another hurdle: the tax authorities. Whilst the question “should I report my bitcoin profits?” was clarified by the Inland Revenue some four years ago, the more sobering questions of “how to report bitcoin profits?” and “how much will I be taxed?” have made it to the front of the line.

Whilst bitcoin continues to stir controversy for its inherent value, how bitcoin is accounted for is a far less epistemological thought- rooted in the International Financial Reporting Standards which, unsurprisingly, have not budged.

Currency (why don’t you come on over)

Cryptocurrency is not issued or backed by any government (at least for now), and so cannot be classified as “cash”. Nor does cryptocurrency confer to the holder a contractual right to receive cash or another financial asset (excuse the formulaic definition of “financial instrument”). Of course bitcoin has no physical form, so it cannot be accounted for as “property, plant and equipment”. This narrows down its classification to either of two forms, depending on the circumstances of the investor.

Inventory

Inventories are held for sale in the ordinary course of business. If you are a private investor who actively trades in bitcoin, for example, but not restricted to, “mining” coins, HMRC will view your ownership of bitcoin to be “for sale in the ordinary course of your business”. Consequently your profits will be deemed to be “income” which, as you know, is taxed at 20%, 40% and 45% instead of 10% or 20% as with Capital Gains Tax (CGT). HMRC and the courts will apply any of nine “badges” in deciding whether an activity constitutes a trade so professional advice should be sought on the optimal setup for a trader, as well as the tax and reporting implications.

Intangible assets (IAS 38)

Cryptocurrencies also meet the definition of an intangible asset: one which can be sold, exchanged or transferred individually and which has no physical form. This treatment of bitcoin as an intangible is pioneering for three reasons:

  1. This intangible asset is traded with a profit motive. Remember, intangible assets, say patents or brand names, have traditionally been assets held for use in the production process.
  2. Because of its essence in having no physical form, bitcoin carries low detection risk, compounding the profit motive above.
  3. Scale, and the sheer volume of investors who have crowded into this trade, compounding one and two above.

Taxation of bitcoin as an intangible attracts CGT at the less penile rates of 10% and 20%, depending on your tax bracket. In this case, investors would do well to seek professional advice on the correct measurement basis of gains and, for example, working out the tax when you have held different parts of your bitcoin portfolio for different periods of time.

How will they know (if I really own it)?

One theme from this tax season has been the reportability of cryptocurrency-related profits (though surprisingly, not so much losses!?). Note the following: UK-based trading platforms must provide data to HMRC on their customers. This may seem a moot point for now because the vast majority of cryptocurrency trading in the UK takes place on overseas exchanges, which may explain the low incidence of tax investigations. In this era of cross-border information sharing however, cross-border information sharing of cryptocurrency activity, and traders, may not be far away. In the US, Coinbase, the country’s most popular exchange, has already handed over identity information of 14,000 of its most frequent traders to the Inland Revenue Service. It would be fair to assume that HMRC too will tackle this traceability issue heads-on: tax payers who do not properly report their gains of virtual currency transactions may find themselves with penalties and interest.

Investment in cryptocurrencies merits investment in professional advice, whether you have made profits, or losses.
Contact Mouktaris & Co
to ensure that you report correctly, structure optimally and avoid the pitfalls, and potential repercussions, of getting it wrong.

Stay compliant, and keep hydrated.

 

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