Help & Advice
What is Making Tax Digital (MTD)?
MTD will affect every individual who is a taxpayer and every business in the UK. It will change the way that businesses keep their accounting records and report their income to HMRC, and the services that they need from their accountant or tax agent. The new regime will also offer the opportunity for self-employed taxpayers to pay their tax through optional “pay as you go” instalments, based on the data filed with HMRC under MTD.
Taxpayers will have to to adopt digital record keeping and make submissions to HMRC on a regular basis. HMRC’s ambition is to become one of the most digitally advanced tax administration in the world. MTD is a key part of this plan.
To be MTD compliant you must do two things; complete bookkeeping digitally and submit information to HMRC using appropriate software. We offer training in QuickBooks Online. You decide how much or how little you want to do; we do the rest.
VAT – Private tuition exemption -Once your turnover exceeds the VAT threshold (£85,000 pa from 1 April 2019) you will have to register for VAT and charge VAT on all your invoices. As your customers will not usually be VAT registered this effectively increases you charges to them by 20%.
There is a very important VAT break known as the “Private tuition exemption”. To qualify two conditions must be satisfied to exempt the supply:
The supply must be of a subject ordinarily taught in a school or university. If there is any doubt get evidence.
The service must be provided by an individual or partnership, independently of an employer. Limited companies will not qualify as the individuals working for the business are not independent of an employer.https://www.gov.uk/guidance/vat-on-education-and-vocational-training-notice-70130
Building and construction reverse
charge – From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
• for individuals or businesses who are registered for VAT in the UK
• reported within the Construction Industry Scheme
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse
https://www.youtube.com/watch?v=-FcmZlFcu6w
These new rules will apply to you if:
• You are VAT registered builder.
• You subcontract work out to other builders. For example, where a subcontractor invoices you and you (as the main contractor) then invoice the client.
• You invoice other builders for your services.
These new rules are being introduced to reduce fraud
The change is for VAT registered builder to VAT register builder transactions.
If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT. The net effect is the same. For example, your subcontractor completes £1,000 of work for your and you add £1,000 of your work and invoice the customer.
The change is for VAT registered builder to VAT register builder transactions.
If you are the builder supplying the end customer, the builders sub-contracting to you will invoice you without charging VAT. You then invoice the end customer and charge VAT.
The net effect is the same. For example, your subcontractor completes £1,000 of work for you and you add £1,000 of your work and invoice the customer.
Pre 1 October 2020 procedure.
On your VAT Return:
Box 1 VAT on sales £400
Box 4 VAT on purchases £200
Box 5 VAT to be paid £200
Box 6 net sales £2,000
Box 7 net purchases £1,000
Your net receipt £1,000
From 1 March 2021 the new procedure is:
Subcontractor invoices you £1,000
You invoice your customer £2,000 plus £400 VAT
On your VAT Return:
Box 1 VAT on sales £400
Box 4 VAT on purchases £nil
Box 5 VAT to be paid £400
Box 6 net sales £2,000
Box 7 net purchases £1,000
Your net receipt £1,000
This type of procedure is referred to by HMRC as “reverse charge”.
Where you are the builder supplying another VAT registered builder you do so without charging VAT.
Transactions caught by the new rules.
Services and goods supplied to construction customers.
Supplies chargeable at 5% or 20%.
Transactions not caught by the new rules.
Supplies to non-construction customers.
Supplies to non-VAT registered customers.
Supplies of staff or workers.
Exempt and Zero-rated sales.
Businesses that are connected, e.g. a landlord and his tenant, two companies in the same group.
Other responsibilities – Subcontractor to main contractor.
You must ensure that the main contractor you are invoicing has a valid VAT number and is registered for the CIS (Construction Industry Scheme).
For further information see Section 9 of HMRC VAT Notice 735: Domestic reverse charge procedure
On your invoice you must include the wording “Customer to pay VAT under reverse charge procedure” and show whether the rate the main contractor must recharge is 5% or 20%.
Other responsibilities – Main contractor (who invoices end user customer).
You must make your VAT registered subcontractors aware the you are an “intermediary supplier” and that they should not charge you VAT under these new reverse charge rules. If you pay VAT incorrectly to your subcontractor HMRC may pursue you for the VAT.
You must identify the status of your end user customers. We recommend you ask your end user customers to sign a statement for each contract or include this in your terms of business. Contact Tax Data Ltd for the wording.
What else do you need to look at.
Consider if you can continue or if it is still tax efficient to use The Flat Rate Scheme and Cash accountancy, if you currently use these.
Are you/your staff up to identifying relevant contracts and end users affected by this?
Can your current bookkeeping system cope with the new invoicing and reporting requirements?
For subcontractors are the start of the supply chain you will still be claiming VAT on your expenses but not charging VAT on sales to main contractors. This may put you in a VAT repayment position. For cashflow purposes it may be beneficial to switch to monthly Returns.