Mike Smith, the senior director of Companydebt.com and a business insolvency expert, talks to IMS StratNews:

Reverse charge measures, which were first announced in the Autumn Budget of 2017, are set to be implemented by HMRC next year, and could add to the cash-flow woes in the already struggling construction sector.

It’s estimated the changes could affect up to 150,000 construction businesses, with the end customer rather than the supplier being made responsible for certain VAT payments.

There are fears across the sector that the changes, which are an attempt to reduce the huge hole left in the public purse by ‘missing trader fraud’, could force small and medium-sized construction firms out of business and push larger operators into a state of bureaucratic limbo. 

What is missing trader fraud?

Missing trader fraud is a scam that takes place across a range of industries but that has recently taken hold in the supply chains of the construction industry. Fraudsters exploit a loophole in the UK’s complex VAT system which allows them to steal government money.

In a legitimate transaction, a subcontractor charges the contractor for the work they’ve done, plus 20 percent VAT. This VAT is then paid over to the government by the subcontractor on a quarterly basis. As a service or product moves up the supply chain, VAT is added for every new transaction and subcontractors recoup the VAT they have paid their suppliers.

Fraudsters exploit the weaknesses in this process by setting up shell companies that initially appear to operate normally, but quickly disappear without filing tax returns after they have been paid for work. The result is that the VAT owing to the exchequer is never paid over to HMRC.

Although this type of scam is relatively new in the construction industry, it is still believed that fraudsters operating in this area cost the government around £100m a year in lost VAT. That’s a small proportion of the total £13bn lost to missing trader fraud in the UK every year, but it’s still something the government is eager to stamp out.

The new reverse charge taxation system

Although the loss to the exchequer is relatively small, under the new reverse charge system, the whole of the construction industry will have to bear the brunt of the crackdown. Coming into force in October 2019, the reverse charge taxation system will cease the flow of cash between construction businesses. For every transaction that takes place, the VAT will be a paper exercise only and registered as a ‘reverse charge’ on the invoice. That means only the client-facing organisations at the top of the chain will be responsible for paying the VAT.

Understanding whether the new rules apply to a particular construction firm is relatively simple. Any company registered with the Construction Industry Scheme (CIS) will have to register a reverse charge for VAT on their invoices.

Any business that’s not CIS-registered will continue to charge VAT when the transaction takes place.

Construction firms that sell directly to domestic customers will continue to charge VAT on their products and services and will not be affected by the changes.

What are the potential implications of the new system for construction firms?

Arguably the most damaging implication for construction firms is the impact the new system will have on cash-flow. Without VAT to rely on, many businesses could struggle to make their own payments and potentially become insolvent as a result.

The new system could also create problems for the large firms at the top of the chain, as the onus will fall on them to pay over large sums of money to HMRC. That could create its own range of financial issues. The construction industry as a whole will also have to get its head around the new accounting system, which will inevitably take time and potentially cause accounting errors that could lead to unsustainable levels of debt.    

Construction firms should start preparing

For larger firms with professional tax advisors, these changes should be relatively simple to implement and absorb, but smaller subcontractors that handle their own tax obligations should start preparing now.

The risk is that subcontractors who do not educate themselves and adapt to the new system could make costly mistakes on their invoices.

If suppliers continue to charge VAT on their invoices then they will have to reverse those invoices out of their accounting system: Although that sounds like a simple process, the VAT that has been raised will automatically be owed to the state.

The consultation on the implementation of the new system concludes in October 2018. After that point, construction firms have a year to prepare before the changes are made.  

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Employer

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Limited Company

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Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency and taxation complexities

To find out more about Non-UK resident shareholders and directors taxation complexities see our guide via our ‘Gold Membership’ at https://www.imsstratnews.com/non-uk-resident-…rs-company-taxes/

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UK limited liability companies with Non-UK resident shareholders and directors have often had to tip-toe through a range of taxation complexities.

Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency 

However, this resident status can be affected by a double tax treaty. 

A typical treaty provision provides that, for treaty purposes, a company can be treated as a tax resident dependent on where its effective management and control is located.

Turner directs attention to official commentary relating to the OECD model tax treaty (which will apply in most cases, and the Revenue and Courts will follow), which defines the place of effective management and control as:

‘The place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions; the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.

What exactly does this mean?

• The treaty provision in relation to residency is determined by where all key operational decisions are made by the company’s executives and management: ‘The place of effective management’.
•  This location needs to be where senior figures in the company – primarily the Board of Directors – make those decisions.
• This location also needs to be where company operations mainly take place.
• A caveat or condition exists that states all of the above must be fully investigated before a company qualifies for this treaty provision, despite the overarching rules within the treaty provision.
• Ultimately therefore, if, under this test, a UK resident company is managed from overseas it may be classed as treaty non resident.

In addition:

• Significantly, business may be managed from more than one location, but a company can only have one ‘place of effective management’.

and,

• Importantly, UK tax legislation states that, where this applies, the company is treated as not resident in the UK: Note that this is a special rule – so it means that all `treaty non-resident’ companies are not UK resident for all taxation purposes

The Takeaway

Non-UK resident shareholders and directors: income tax & dividends

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The firm is an exciting automated smart business current account, built for the unique needs of freelancers and self-employed people.

It offers this group the accounting tools they need to manage taxes, stay on top of expenses and get paid on-time! 

The app-based company’s smart current account combines banking, accounting and tax services designed specifically for this area of the UK’s fast-growing workforce, including the so-called ‘gig economy‘.

Coconut launched its iPhone app for sole traders on 31 January 2018, and has since opened 2,500 current accounts with £10 mln payments processed.

In September 2018 it also pre-approved its first Android customer, and says it continues to build features to support sole traders; in addition, it is developing tools aimed at including in the future limited company contractors.

The company is backed by leading tech accelerator, Techstars, and is one of the ten winners of the Nesta Open Up Challenge; a competition which awards prizes to innovative businesses using new Open Banking APIs.

Who is Elaine Clark?

Elaine Clark created the Cheapaccounting.co.uk franchise, which was established to make small business accounting as efficient and cost effective as possible.

Coconut says she brings a wide range of experience to the firm, which will help it build additional tools perfectly suited for those accountants who support these customers.

Elaine Clark tells IMS StratNews:  “I’m really excited to be working with the Coconut team, as they build out the accountancy offering of their product.

“I think the convergence of banking and accounting will be more transformative than cloud accounting was 10 years ago; we want accountants to be able to harness the full potential of technologies like machine learning, to enable them to better service their clients – while also improving margins and allowing them to grow their practices.

“Coconut will soon allow them to do this in a single tailored product.”

Clark also adds that Coconut is building a community of accountants in a Facebook group called Coconut Partners: “In the same way that customers have been a driving force in the development of features, they aim to do the same with the accounting community”, she says.

What Coconut says

Sam O’Connor, co-founder and CEO at Coconut, says, “Coconut is bringing banking and accounting together to eliminate business admin for self-employed people and small business owners. But we want the accountants our customers work with to also benefit from real-time bookkeeping and rich data, because this saves everyone time and money.

“Ninety percent of businesses in the UK are owner managed and 90% of the growth in small companies since 2001 are non-employers.

“These businesses tend to have simpler requirements than bigger businesses, but the products out there are complicated and dated, so haven’t kept up with the shift in the market.

“We think that these businesses, and the accountants that support them, need access to the most advanced technologies, and Coconut will provide this in a tailored product.”

By Ingrid Smith, Inhouse Editor

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