Brexit: Deal or No Deal?

The dreaded ‘B’ word,  hasn’t been mentioned by us until now. That’ll be “Brexit”, then. Up to now, we have resisted temptation to even utter the word. But we are getting a bit close now to what  may happen: Deal? No deal? No Brexit post Referendum #2? Don’t laugh at No Brexit, it could happen. We cover all potential political angles here.

VAT’s NO DEAL

The government has announced through guidance dated in August 2018 that if there is a No Deal Brexit, businesses importing goods from the EU or from outside the EU will not have to pay import VAT as soon as the goods arrive in the UK. This will allow importers to account for the VAT later on their VAT returns and would give positive help because it will aid help cash flow. For example if you bring goods in on 30th June 2019 you’ll have at least until 10th August 2019 to pay, if you use direct debit with a June VAT quarter date. If you imported on 1st April 2019 you’d have until 10th August 2019. HMRC is saying though that customs declarations and other duties will still be required for imports from the EU, in the same way as currently applies when importing goods from outside the EU. An import declaration will be needed and customs duties must be paid. Customs checks may also be performed at the place of importation. All goods entering the UK as parcels sent by overseas businesses will be liable for VAT unless they are zero-rated or exempt from VAT. For parcels valued at £135 or less, a so called “technology-based solution” will collect VAT from the overseas business selling the goods into the UK. How this would work is not clear, yet.

What future Techie Tax Breaks?

Small and medium businesses involved in research and development get very generous tax relief at the moment in the UK. Up to one third of qualifying costs can be recovered through the tax system. The No Deal prospect is leaving some business owners pretty concerned about the future of tax relief. On the basis of not having that crystal ball, no one knows how the ‘B’ word will affect tax relief. This type of tax relief like many other tax issues, will need to be resolved. This is because the tax relief for small and medium business is treated as notified state aid. It is “notified” to the European Commission as it is considered generous enough to have the potential to distort competition amongst member states. If Brexit happens, the UK will no longer need to consider state aid rules, leaving the Treasury free to dictate the availability and extent of the relief. In the 2017 Autumn Statement there were indications of an ongoing commitment by Government to support the relief. It appears that this tax relief would be a central component of the UK’s policy to encourage this research and development activity. The two current schemes for this (including the one for small and medium business) may need to be harmonised and this may lead to more simplicity for small enterprises that receive grant funding. In the meantime, tax relief for research and development is very much available. If you carry out such activity, it may qualify for generous tax breaks. If you would like guidance and support, including the preparation of tax claims, please contact us.

The Reverse Charge Mechanism is Coming

HMRC is planning to introduce new rules to combat construction fraud. The changes are a long way off, but we want to tell you about this now in case you haven’t heard about this yet. The really fine detail won’t be decided by HMRC until October 2018. The changes will apply from October 2019. Why such a long delay? The reason is that these changes will affect thousands of VAT (small to medium) businesses, and HMRC doesn’t have a good record on getting things right first time.

What will happen?

Even this bit is pretty complex, although it doesn’t affect everyone using building services, for example domestic consumers and only designated businesses. Those designated businesses falling in this plan will not collect VAT on their sales to their specified customers.  Instead their customer will account for the output VAT under the reverse charge mechanism. Reverse charge is where the specified customer prepares a special invoice for the supply of work. Let’s choose a random example and say a VAT registered groundworker supplies 2 days of services valued £1000. The groundworker’s customer is “Acme Groundworks Ltd”. “Acme” is going to invoice Builder for £300,000 to prepare the site and install roads and utilities etc. The groundworker has to make an Invoice to “Acme” for only £1000 and it will contain the normal information required on a VAT invoice, except the VAT. The invoice must also include a reference to the reverse charge – for example one of the following:

• reverse charge: VAT Act 1994 Section 55A applies
• reverse charge: S55A VATA 94 applies
• reverse charge: Customer to pay the VAT to HMRC

“Acme” makes out a special invoice for say £1,000 plus £200 VAT and refers to reverse charge and groundworker’s VAT number. It shows £1,000 input value and £200.00 VAT on its VAT return. On the same return is shown £200.00 as sales VAT but no entry for the £1,000 as sales value. Using reverse charge, “Acme” get their £200 VAT allowed but also HMRC know that the £200.00 groundworker services VAT has been covered. The net cash effect on “Acme” is just the £1000 it pays to the groundworker. Without reverse charge, if the groundworker did not put the £200 on their VAT return, and went missing, HMRC would have been out of pocket by £200.00. By the way, we are not casting aspersions about groundworkers, just giving an example! Of course, you could say that this can happen in any VAT situation, construction or not, and you’d be right. HMRC are saying that fraud in construction is particularly prevalent. As to how much tax will be recovered , that is being debated. The types of construction services affected are based on those to which the construction industry scheme applies. If goods are supplied with the affected services, the goods would also be subject to the reverse charge. (There are several very complex examples of exceptions from the reverse charge mechanism involving intermediaries. Without getting too technical the most common one will be at the end of the chain –  Retail customers such as a Builder selling a freehold or leasehold to an owner or occupier) Going back to our example, our Builder would not apply reverse charge to the “Acme” bill of £300,000 because Builder will sell houses direct to freeholders or long leaseholders. “Acme” will issue their invoice in the usual way.

Simple?

Is it ever simple when it comes to changes in VAT from HMRXC? If you are confused, or just need some help, contact us and talk to us about VAT and let us help you handle it better.