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Employment allowance to increase by £1,000

Steps in the right direction to take some weight off the shoulders of SMEs.

The Chancellor announced an increase in the Employment Allowance from £3,000 to £4,000 to protect small businesses from the rise in the minimum wage. From next month companies will not have to pay Employer National Insurance Contributions on the first £4,000 of their annual bill.

Changes had already been announced that the Allowance is only available where from 6 April the Class 1 National Insurance bill of the business or charity was below £100,000 in the previous tax year.

You cannot claim the Employment Allowance from April 2020 if:

  • you’re the director and the only employee paid above the secondary threshold
  • you employ someone for personal, household or domestic work (like a nanny or gardener) – unless they’re a care or support worker
  • you’re a public body or business doing more than half your work in the public sector (such as local councils and NHS services) – unless you’re a charity
  • you’re a service company working under ‘IR35 rules’ and your only income is the earnings of the intermediary (such as your personal service company, limited company or partnership)
  • Class 1 National Insurance contributions (NICs) liability are at or above £100,000 in the tax year before the year of claim. This includes connected companies
  • if the business exceeds the de minimis state aid threshold.

From 6 April 2020 the Employment Allowance falls within the state aid definition and those claiming the employment allowance will need to declare they do not exceed the de minimus state aid threshold. This means it will contribute to the total aid you are allowed to get under the relevant de minimis state aid cap in the relevant three year period.

Business rates changes

Business rates to be scrapped for certain businesses…

Business rates will be abolished altogether for smaller firms in retail, leisure and hospitality – a tax cut worth up to £1bn. The scrappage will only apply to premises with a rateable value of up to £51,000 to help cushion the blow from decreased demand until end-2020.

…other small businesses to receive cash grant

Small businesses that pay no business rates will receive a £3,000 cash grant, worth a total of £3bn.

CGT: reduction in Entrepreneurs’ Relief lifetime limit

Significant cut to lifetime limit – but not quite abolition.

Effective immediately (from 11 March 2020) the lifetime limit on gains eligible for Entrepreneurs’ Relief (which offers a reduced 10% rate of CGT on qualifying disposals) will be reduced from £10m to £1 million.

The legislative detail will be introduced in Finance Bill 2020. It has been announced that Finance Bill will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past. Therefore, any entrepreneurs who have already claimed this relief on past business disposals for gains in excess of £1m will no longer have access to this relief.

This is a significant reduction that was anticipated in some form, and comes in response to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers.

The good news is that it has not been completely abolished and will still be available for small to medium sized business disposals, subject to the usual criteria for eligibility.

NEW PROCEDURES FOR BUILDERS / SUBCONTRACTORS EFFECTIVE OCTOBER 2019

VAT: NEW ACCOUNTING PROCEDURES FOR BUILDERS / SUBCONTRACTORS

You may have read that new procedures are being introduced on 1 October 2019 which will affect any construction business where the contractor and subcontractor are both VAT registered.

Under current rules, a builder charges VAT in the usual way. This is changing for supplies of both labour and materials between these businesses. The subcontractor will invoice the contractor without charging VAT. The contractor will account for the VAT on their return under what is known as the “reverse charge” procedure. The contractor will not be affected as the notional VAT is included both as a receipt and payment in boxes 1 and 4 on the VAT return (box 7 will still include the net value of the payment).

The reverse charge is based on the rate of VAT that applies for the work in question but only supplies subject to either 5% or 20% that are included. Zero rate supplies are excluded.

OTHER ISSUES TO CONSIDER

Both contractor and subcontractor must ensure that they are registered for CIS and have a valid VAT number.

The subcontractor will specify on his sales invoices the amount and rate of VAT that the contractor needs to declare under the “reverse charge” procedure. Although not required, we feel it would be beneficial to include the contractor’s VAT number on the invoice.

The subcontractor should include wording along the lines of “Reverse charge. Customer to account for the VAT to HMRC”.

HMRC suggests that if there are any doubts about the credentials of a contractor customer, a deposit equal to the amount of VAT not being charged should be collected from the contractor e.g. if they have asked for but not received a VAT number.

We hope this is reasonably clear but if you have any queries please don’t hesitate to contact us.

Making Tax Digital – update

A controversial policy of HMRC has always been that a business using, for example, the cash accounting scheme and spreadsheets to digitally record their expenses had to record every single purchase invoice in a digital format, even though the business might make a single payment to a supplier based on a statement covering perhaps 40 or 50 different invoices.

It would be sensible for the business to just make a one-line entry on the spreadsheet based on the payment total. With the cash accounting scheme, input tax is only claimed when payments are made to suppliers. That policy has now changed.

The latest update from HMRC on 5 May 2019 allows the supplier statements to be used to record expenses for input tax purposes – a big time saving for many businesses that adopt spreadsheet accounting.

 

Making Tax Digital (MTD) is on the horizon for many businesses.

MTD affects VAT first. For return periods starting on or after 1 April 2019, businesses operating over the VAT threshold (currently £85,000) must keep records digitally, using MTD functional compatible software.

That’s essentially software, or a combination of software and spreadsheets, which can connect to HMRC via an Application Programming Interface. VAT submissions will then be made direct from the digital records. Manual input will not be acceptable, although there will be a ‘soft landing’ period of 12 months where HMRC will not impose penalties if digital links do not exist between software programs used for submission.

It will no longer be possible to submit returns through HMRC’s online portal – except for businesses voluntarily registered for VAT. These businesses will not have to comply unless electing to enter the MTD regime.