The Fizz! Blog

Big VAT changes in the building industry in 2019

There's an ongoing problem with the VAT system.  When one VAT-registered business is selling to another VAT-registered business, the transaction is generally "VAT-neutral".  One company charges VAT to the other company, which pays it to them.  The first company gives the VAT to HMRC, the second company claims back exactly the same amount from HMRC.  Overall everyone is in the same position.  That's how it's supposed to work - at root, VAT is a tax on consumers, not on businesses.

There's a problem there, though.  What happens if the first company doesn't give the VAT to HMRC, but instead shuts down or goes missing?  The second company will still most likely claim the VAT back from HMRC, and get it.  In that case, the public finances (we) have lost out.  That wasn't a VAT-neutral exchange.

This "missing trader" fraud used to be a particularly big problem with the import and export of computer chips and mobile phones, where it was relatively easy to create large purchases and sales of those commodities, and make off with one half of the VAT.  That was known as "carousel" fraud.  You don't hear about it so much today - presumably HMRC are largely on top of it now.

Another industry where HMRC clearly think it's a problem is the construction industry, where they consider businesses are similarly prone to disappearing, along with the VAT they've been given by a customer.  So, next year, in October 2019, the way VAT works in construction will change.  In the kind of example above, the supplier will no longer charge VAT to the customer.  Instead, the customer will just put both the VAT on the sale AND the VAT on the purchase on their own return, just as an academic exercise, cancelling each other out (this sounds redundant, but is necessary since there are occasions where someone is blocked from getting all the VAT back on their costs).  So the supplier no longer has any VAT to run away with.

This is an excellent idea in general, though it's fair to say that not every trader in the building industry has totally bomb-proof accounting systems, so in practice there's bound to be a bit of confusion to begin with!

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Tax lessons from an exotic dancer

A recent tax case had a couple of aspects that are actually of quite general use and interest when looking at Self Employed tax - even if you might think it unlikely that a case concerned with exotic dancing would be of relevance to you!

Gemma Daniels was (maybe still) is a dancer at Stringfellows.  HMRC looked into her tax returns, and deemed that she'd inappropriately claimed tax relief for a) travel costs and b) clothing.  The case went to a tax tribunal.  The first aspect went the way one would have expected, but the second didn't necessarily do the same.

First, travel.  Home to workplace travel isn't a deductible cost for a self-employed person, though travel from one workplace to another often is.  Since the Dr Samadian case of a couple of years ago, it's become accepted that if you regularly travel somewhere to perform your main business activity, that's probably a home to workplace trip, and having some home office activity doesn't negate that.  Dr Samadian regularly attended private hospitals on a regular timetable, and wasn't allowed tax relief for his travel costs - he had a home office where he did administrative work, but he didn't see patients there.  Similarly, Gemma Daniels didn't dance for anyone at home, even though she did her admin there, she danced only at Stringfellows.  Her travel costs therefore weren't allowed either.  So far, so predictable.

The clothes claim didn't go exactly as expected though.  The principal case on this since time began has been Mallalieu vs Drummond, where it was held that the formal clothes a barrister wore weren't claimable, because they were something that could also reasonably be worn in other contexts.  In the case of Gemma Daniels, the judge was happy that the clothes she had claimed for were not clothes that would generally be worn in any other context - they were in the nature of a costume.  In the case of some 10-inch heels that were in question, fair enough.  But the judge was also happy that skimpy lingerie wasn't something that anyone would wear in a non-performance context.  And that thick make-up, fake tan and hair extensions were similarly unlikely to be paid for by any regular person.  Perhaps that's a reflection on the judge's life as much as anything!

So, although the travel point was as expected, and not in the taxpayer's favour, the clothing point offers some hope that "costume" might not have to be quite as outlandish as has generally been considered the case.  Normal day to day clothing still isn't going to be claimable, though.

As a final point - HMRC had a second go at the clothing claim, claiming the lack of invoices and receipts made them inadmissible.  It didn't.  It would have been helpful if Gemma Daniels had been better at keeping proper records, but it hadn't been suggested at any point that she was being untruthful, so the judge allowed the claim regardless.  Do try and keep receipts, but their absence isn't always terminal.

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Avoiding the Child Benefit trap

Since 2013, something called the High Income Child Benefit Charge (HICBC) has been in place.  If the higher earner in a household that has received Child Benefit has income of more than £50,000, they have to start giving the Child Benefit back to the government again, on a sliding scale, via their Self Assessment Tax Return.  If they have income of more than £60,000, they have to give it all back.

If both parents earn £50,000, that's therefore fine - nothing to give back, even though total household income is £100,000.  But if one earns £60,000 and the other zero (or a single parent has income of £60,000) then all of the Child Benefit has to be given back, despite household income being £40,000 lower!

If you've two children, HICBC could mean giving back nearly £1,800 of Child Benefit to the government.

The new system wasn't brilliantly publicised, and many of those affected weren't in the Self Assessment system anyway, so didn't have the new question on their tax return to alert them to the change.  So it's not uncommon to see people suddenly being told they need to pay back several years' Child Benefit to HMRC.  HMRC might accept repayment over a period of time, but repayment will have to be made.

The most obvious way you could avoid or reduce the charge is with pension contributions.  If your income is £60,000, then paying £10,000 into a pension (which means making an £8,000 contribution, as personal pension contributions are paid net of 20% tax) reduces your income to £50,000 for these purposes, and you get to keep all the Child Benefit.  Of course, if you're struggling with household income as it is, or earning way over £60,000, things may not be as easy as that.  But if you can stand the short-term cashflow hit, pension contributions do become very tempting at that level of income - and the more children you have, the greater the saving!

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