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Tax Bulletin : September 2018

Welcome to September’s edition of Tax Bulletin, a monthly newsletter to keep you and your business on top of all things tax related.

In this month’s Bulletin we bring news of potential new VAT rules for the construction industry, invite readers to our Making Tax Digital seminar, then we answer a question about how Inheritance Tax taper relief works in practice, before finishing up with a tax tip maximising Capital Gains Tax private residence relief with careful planning.

I hope you find something of interest and, as always, if you want further advice on any of the areas covered, then please call or email me.

Kind regards
Keith Witchell
Keith Witchell FCA FCCA CTA
Keith Witchell
tax news
NEW VAT RULES FOR THE CONSTRUCTION INDUSTRY ON THE HORIZON

HMRC has published draft legislation that aims to shift the VAT liability for construction work from the supplier to the customer from October 2019.

Under normal VAT rules, when a sale is made VAT is charged by the supplier of the goods/services and then collected from the customer, and paid over to HMRC. However, due to an increasing number of failing businesses in the construction sector, HMRC are not always able to recover the VAT collected and they wish to mitigate their ‘exposure’.

To combat this, from October 2019 HMRC intend to implement a reverse charge system whereby a construction business that supplies goods/services to another construction business won’t charge any VAT on their sales invoice, but instead the customer will account for output VAT on their purchase, and then also reclaim the input VAT on their purchase. It is therefore an ‘in and out’ for the customer and no VAT changes hands.

Confused? Let’s consider an example. A plumbing business carries out work on a new school and invoices the main contractor £10,000. Under current rules it will invoice £10,000 plus 20% VAT, and will then collect £12,000 from the main contractor, and pay over VAT of £2,000 to HMRC on its next VAT return. However, under the new rules it will charge £10,000 but without adding VAT. The main contractor will account for £2,000 of output VAT on the supply under the reverse charge rules, and will then also reclaim the £2,000 as input VAT. This means that instead of the plumbing business paying £2,000 of VAT to HMRC and the main contractor reclaiming £2,000 of VAT from HMRC, no VAT changes hands at all. The logic is that if the plumbing business were to go bust then HMRC are not at risk of never recovering the £2,000 of VAT collected from the main contractor. Simple eh?!

These rules are only expected to apply to supplies made to/from businesses within the construction sector, and will therefore capture the same businesses that currently have to operate under the Construction Industry Scheme for direct taxes. It will not therefore apply if a builder does work for a domestic customer, or if a builder does work directly for a business not itself in the construction sector. In those cases VAT will still be charged as before.

While the legislation is still currently in draft form, the consultation period closed in July, and it is highly likely that these changes will go ahead. Rest assured that we’ll keep you updated, and we’ll be in touch with affected clients once the changes are confirmed.

For further advice on this matter please contact me.

  1. HMRC has published draft legislation to bring reverse charge VAT into the construction sector
  2. The changes will limit HMRC’s exposure to failing businesses in the sector
  3. The new rules are expected to kick off on 1 October 2019
  4. No VAT will be charged on invoices from one construction business to another
  5. The customer will account for the output and input VAT on their VAT return
tax news
SEMINAR – MAKING TAX DIGITAL: IS YOUR BUSINESS READY?
With Making Tax Digital for VAT arriving in April 2019, we are holding a free seminar exploring the forthcoming changes and how your business will be affected.

Making Tax Digital (MTD) will see all businesses eventually submitting all of their tax and VAT information to HM Revenue & Customs quarterly using MTD-compliant software.

While the start date for the quarterly Income and Corporation Tax reporting is yet to be confirmed, MTD for VAT will kick off in April 2019 for all VAT registered businesses with an annual turnover above the VAT threshold (currently £85,000 per annum).

The changes for VAT will mean that submitting VAT returns using HMRC’s website will no longer be possible; all affected businesses will need to submit their VAT returns from MTD-compliant bookkeeping software, such as Xero.

To ensure you are prepared for the changes, we are holding a short free seminar next month on two separate dates, at Xero’s Milton Keynes HQ:

Tueday 16 October 2018
9am for coffee
Seminar starts 9.30am

Tuesday 30 October 2018
4pm for coffee
seminar starts 4.30pm

Where:
Xero HQ
Bank House
171 Midsummer Boulevard
Milton Keynes
MK9 1EB
(Pay and display parking is available nearby)

Places are limited, so if you’d like to come along, please contact Esme as soon as possible to reserve your place. We look forward to seeing you there.

For more information on MTD or Xero, please contact Alex Beattie

  1. Making Tax Digital (MTD) will see all businesses submitting tax/VAT info quarterly
  2. MTD for VAT arrives first in April 2019 for all VAT registered businesses with turnover >£85k pa
  3. Submitting VAT returns using HMRC’s website will no longer be possible for affected businesses
  4. Dates for the introduction of MTD for Income and Corporation Tax are not yet confirmed
  5. KRW are holding a free seminar to help you ensure your business is MTD-ready
tax news
HOW DOES INHERITANCE TAX TAPER RELIEF WORK IN PRACTICE?
Taper relief reduces the Inheritance Tax payable on gifts made during a taxpayer’s lifetime, providing they survive at least 3 years from making the gift.

Many readers will be familiar with the 7 year rule in relation to making lifetime gifts to mitigate Inheritance Tax: gifts made during a taxpayers lifetime are known as potentially exempt transfers, and will usually be outside the scope of Inheritance Tax after 7 years have elapsed.

For this reason many people gift assets to the next generation/s during their lifetimes in the hope of escaping a 40% Inheritance Tax charge for their beneficiaries to pay when they die. Providing the donor doesn’t continue to derive a benefit from the asset gifted then this usually represents simple and effective Inheritance Tax planning.

But what if you don’t live for 7 years after making the gift? There is a measure called taper relief which reduces the tax payable on gifts once 3 years have elapsed from making the gift. It works on a sliding scale with the tax on gifts reducing by 20% where the donor survives 3 to 4 years, by 40% where they survive 4 to 5 years, 60% where they survive 5 to 6 years, and 80% where they survive 6 to 7 years after making the gifts. This means that an Inheritance Tax saving is achieved after just 3 years.

But does it? A common misconception with taper relief is that it reduces the value of the lifetime gifts to be taken into account when drawing up the Inheritance Tax account on death. In actual fact, taper relief reduces the tax on the lifetime gifts, but not the value of those gifts. Same thing right? Unfortunately not, as when the estate calculation is made, the Inheritance Tax nil rate band (currently £325,000 per taxpayer, and with unused nil rate bands transferring to surviving spouses) is first applied to the lifetime gifts, and then the remainder to the estate upon death.

This means that any lifetime gifts valued below the nil rate band will not get the benefit of taper relief at all, and only the remainder of the nil rate band is available to use against the remaining estate upon death.

However, while the way in which taper relief works is often misunderstood, it is still a very valuable relief, particularly for higher value estates, and making lifetime gifts continues to be an effective planning tool for most families.

For further advice on this matter, or for help with Inheritance Tax planning, please contact me.

  1. Taper relief reduces the tax on lifetime gifts if the donor survives at least 3 years
  2. It works on a sliding scale from years 3 to 7
  3. There is usually no Inheritance Tax on lifetime gifts after 7 years have elapsed
  4. But the relief only applies to the value of gifts over the Inheritance Tax nil rate band
tax news
MAXIMISE CGT PRIVATE RESIDENCE RELIEF WITH CAREFUL PLANNING
Rental property owners that live in the property for a period of time may be able to mitigate their potential Capital Gains Tax liabilities on an eventual sale through careful planning.

If you own a buy-to-let property and live in the property as your only or main home for a period of time you will be entitled to some private residence (PR) relief from Capital Gains Tax when you come to sell it.

In such cases, when calculating the Capital Gain on the sale of the property the period that you lived in the property, plus your final 3 years of ownership are exempt from Capital Gains Tax. In addition, you will be entitled to a letting relief which exempts (up to) a further £40,000.

However, in some cases it can be possible to achieve an even better result by a carefully timed transfer of the property between spouses.

This is best explained with an example:

Harry purchases a buy-to-let property in London for £115,000 in 1990, and rents it out. In 2018 he decides to downsize and puts his country house on the market, with the plan being to move into the London property with his wife. They then intend to live there for around 5 years before retiring and emigrating to Australia.

Assuming everything goes to plan, Harry will end up selling the London property in 2023 when it should fetch £1 million. He will have owned the property for 33 years by then so only the final 5 years of ownership (in which he will have lived in the property as his only or main residence) will attract the PR exemption, plus a further £40,000 of letting relief.

He would therefore be taxed on 28/33rds of the gain of £885,000, less £40,000 of letting relief which gives a potential Chargeable gain of £710,909. After offsetting his annual exemption he will be left with a taxable gain of c.£700,000 which will be taxed at 28%, giving him a liability of £196,000.

However, if Harry had transferred the property to his wife (inter-spouse transfers of assets are exempt from Capital Gains Tax) before they moved into the London property in 2018 he could have wiped out the tax liability completely!

The reason for this is that when a private residence is transferred between spouses, the acquiring spouse takes over the donor spouse’s base cost and usually also their ownership period so that they effectively stand in the shoes of the donor spouse for Capital Gains Tax purposes.

A little known quirk to these rules is that for the ownership period to be transferred, the following must apply at the time of the transfer:

(a) the couple must be married and living together; AND
(b) the property in which the interest is being transferred must be their sole or main residence.

As a result, condition (b) can be broken by Harry transferring the property into his wife’s sole name BEFORE they move into it. As a result, Harry’s wife would take over Harry’s base cost of £115,000 but not his ownership period. She would therefore only own it from 2018 onwards and providing the couple live in it as their only or main residence from 2018 to 2023 then all 5 years of her ownership will attract the PR exemption, making the entire gain exempt from Capital Gains Tax.

For further advice on this matter, please contact me.

  1. By moving into a rental property you can get some private residence relief
  2. You would also get letting relief of up to £40,000 of the remaining Capital Gain
  3. But a carefully timed transfer between spouses could exempt the entire gain
  4. Early advice is recommended to ensure best use of this little know tip