What will be in the financial sector’s New Tax Year resolution list?
The last year has been another year of interminable change for those looking after the tax affairs temporary workers, with many important changes announced from Making Tax Digital for VAT being introduced, to IR35 mutating the temporary labour market and the more recent proposed changes for the domestic reverse charge for VAT.
Making Tax Digital
Making Tax Digital (MTD) is a key part of government’s plan to make it easier for taxpayers to get their tax right and keep on top of their affairs, moving tax information (and collection of taxes) online. All tax jurisdictions across the world are moving in this direction and APIs are the way of the future!
Following the implementation of MTD, HMRC has removed access to the “direct tools” submission for VAT (over 90% of VAT returns were submitted in this way). Accountants and businesses therefore need to submit VAT returns directly from their chosen software from April 2019, for those above the VAT turnover threshold £85,000.
More people will transfer over to bookkeeping packages but not as many as HMRC would have wanted when they first announced the legislation. This is largely because software companies have developed “Bridging software” as a cheap short term solution. By April 2020 everyone will need to link their underlying transactions, however HMRC currently cannot see if a transaction has been linked which may make the process impossible to police.
The Consultation Document (issued in May 2018) considers the effectiveness of the off-payroll working in the public-sector reforms introduced in April 2017 and, unsurprisingly, concludes that the new rules have been effective in reducing non-compliance.
Last year saw public sector workers move into direct employment role, following the rule change in April 2017 for a variety of reasons but mainly pressure from the end user, despite the fact that HMRC’s data shows that “the CEST tool delivers a self-employed outcome in ONLY 60% of cases”. The fear is that large companies in the private sector may take the same approach and, following the introduction of the new rules in April 2019, there will be ‘blanket decisions’ whereby workers will be forced into false employment arrangements.
As many celebrities work on a freelance basis IR35 has reached the headlines many times with BBC workers being pursued. HMRC’s aggressive (and apparently incorrect) interpretation has recently been highlighted by Lorraine Kelly’s success in a £1.2m case brought by HMRC claiming she was “inside IR35” when she clearly wasn’t.
Many more cases will become public as contractors, end clients, recruitment agencies and, more likely Accounting providers gain more confidence to challenging HMRC due to their erroneous and aggressive interpretation of the rules.
The Off Payroll working rules will be extended to the private sector in the tax year beginning 6th April 2020. To be water-tight, you should have a record of your review attached to each contractor’s record which will probably mean using some kind of software solution.
Take it from someone who has conducted a number of IR35 cases, your chances of success against HMRC are high as long as you have an appropriate audit trail of your IR35 review process.
Domestic reverse charge for VAT
Announced in March 2018 The new reverse charge for VAT will become mandatory in October 2019 for the construction industry, meaning the recipient not the supplier has to account for VAT charges.
In simple terms this means instead of the construction company declaring VAT to HMRC themselves the person who pays them has to do it themselves but also the construction company needs to declare that they haven’t received VAT and know that those paying them have paid it.
This topic was raised at a recent Stakeholders meeting with HMRC in February 2019 and it was confirmed verbally that that Employment Agencies who supply only labour will be OUTSIDE the scope of the reverse charge even if they fall within the scope of CIS! This is on the proviso that they clearly only supply workers and not construction services.
In order to be prepared for the changes in October you will need to ensure that your accounting systems adapt to reflect the new changes and that you forecast any cashflow implications as they could be considerable.
Watch this space for more guidance which HMRC has promised to publish soon