Making Tax Digital for VAT

You probably haven’t yet heard that much about MTD but if you’re VAT registered its a new set of rules about how you submit your VAT return to HMRC.

On this web site we explain HMRC’s Making Tax Digital project, known as MTD. We answer the top questions with a pithy answer, then give more detail below once you know the key facts.

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So, what’s MTD all about?

On this site we focus on the impact of MTD for Plumbers, Gas Engineers, Electricians, Builders and other small and mobile businesses. We also explain about MTD Software. Please go ahead and look at the frequently asked questions (FAQ) below.

Making Tax Digital is the most fundamental change to the way UK tax is administered for many years. Deadlines have already been put back a couple of times and now there is a lot of pressure on HMRC to get on with it.

MTD is a rolling program which will run for several years. Over a period of years, all tax reporting and calculations will be subsumed by the MTD project and businesses will be forced to keep digital records and generate their tax returns directly from these records.

This site is brought to you by Powered Now. Our easy-to-use and powerful app runs on iPhones, iPads, Android smartphones and tablets, Macs and PCs. Using Powered Now you can be fully MTD compliant.

 
 

How does Powered Now work with MTD?

Powered Now fully supports Making Tax Digital, below is a replay of a recent Webinar detailing how it all works.

 
 

Domestic Reverse Charge (DRC)

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Domestic Reverse Charge (DRC)

You probably haven’t yet heard that much about DRC but if you’re VAT registered and in the construction/trade industry it’s a new set of rules about how you handle VAT between contractors and subcontractors.

On this web site we explain DRC in full. We answer the top questions with a pithy answer, then give more detail below once you know the key facts.

Fraud
HMRC’s objective is to prevent fraud, which can happen as follows.

A subcontractor who is not VAT registered invoices a contractor with VAT included. The contractor doesn’t mind because they can reclaim the VAT. The subcontractor doesn’t pay the money to HMRC. The result is that the subbie is 20% up and HMRC is the 20% down.

Example of DRC
DRC stops this by making sure that the subbie doesn’t get the VAT whether or not they are VAT registered, thus removing the temptation.

This is how it works before 1/10/2019:

  • Subbie invoices contractor for, say, £1,000 + VAT = £1,200

  • Contractor records supplier invoice for £1,000 + VAT = £1,200

  • Contractor pays subbie £1,200

  • Subbie (if following the rules), adds £200 to Box 1 and £1,000 to Box 6. They will pay HMRC £200 as a result

  • Contractor adds £200 to Box 4 and £1,000 to Box 7. They will claim £200 from HMRC as a result


    How it works on and after 1/10/2019:

  • Subbie invoices contractor for, say, £1,000 with Reverse Charge marked = £1,000

  • Contractor records supplier invoice for £1,000 with Reverse Charge marked = £1,000

  • Contractor pays subbie £1,000

  • Subbie adds £1,000 to Box 6. They will pay nothing to HMRC as a result

  • Contractor adds £1,000 * standard rate (20%) i.e. £200 to Boxes 1 and 4 and £1,000 to Box 7. They will claim nothing from HMRC as a result


    Who does this impact?

    DRC applies to the construction and trade industry. So, on this site we focus on the impact on Plumbers, Gas Engineers, Electricians, Builders and other small and mobile businesses. We also explain about how software can help.
    Please go ahead and look at the frequently asked questions (FAQ) below.

    This site is brought to you by Powered Now. Our easy-to-use and powerful app runs on iPhones, iPads, Android smartphones and tablets, Macs and PCs. Using Powered Now you can be easily DRC compliant.

    How does Powered Now work with DRC?
    Powered Now fully supports Domestic Reverse Charge, below is a replay of a recent Webinar detailing how it all works.

    <<Video Coming Soon>>

DRC FAQs

 

When does the Domestic Reverse Charge start? . . .

DRC starts on the 1 st October 2019. Invoices raised before this date should not apply the DRC. Qualifying invoices raised after this date should use DRC.

We suggest that when you credit invoices, you use the same VAT approach used when the invoice was originally applied.

Similarly, if contracts straddle the DRC start date, we suggest that it is simple – invoices raised before the DRC start date don’t use it, those raised on or after the start date do.

How do I know when DRC applies? . . .

You can use the following table to determine when the reverse charge should be applied to sales invoices (when you are the subcontractor) and supplier invoices (when you are the contractor):

Supplier (Subcontractor) Customer (Contractor) CIS Applies Result
Not VAT Registered Not VAT Registered No No Change
Not VAT Registered VAT Registered No No Change
VAT Registered Not VAT Registered No No Change
VAT Registered VAT Registered No No Change
Not VAT Registered Not VAT Registered Yes No Change
Not VAT Registered VAT Registered Yes No Change
VAT Registered Not VAT Registered Yes No Change
VAT Registered VAT Registered Yes Reverse Charge applies, provided sale is not zero rated
In summary, if both parties are VAT registered, the sale is not zero rated and CIS applies, then reverse charge applies.

What are the penalties for getting the DRC wrong? . . .

HMRC have indicated that they will be initially lenient on any mistakes made where a genuine attempt has been made to comply with the new regulations.

As a result, our advice is to do your best to comply and not to worry about any penalties. This particularly applies to anything raised close to the deadline.

If you can show email correspondence with contractors and subcontractors discussing DRC and establishing where it will apply with them, this is likely to help your case that you have been trying to implement it correctly.

What about the flat rate scheme? . . .

We suggest that the correct treatment should be applied to the original invoice, depending on when it is raised. Then when a payment is received or made, the related invoice and tax treatment will be picked up, irrespective of the date of the payment. Any possible issue should go away after a month or two.

DRC Latest News

HMRC releases final guidance notes on DRC HMRC finally released the full guidance notes on Domestic Reverse Charge on June 7th less than four months before it comes into effect.

This represents the official position of HMRC so is well worth a read.
The notes can be found at: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services

MTD FAQs

 

Latest MTD News

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We know there is a lot to do…

Running your business is a hard task. There are lots of things to do aside from the day job. So we’ve tried to make life a bit easier for you. Our app and software automates a lot of the heavy lifting, so you don’t need to be a slave to the admin.

We’ve written a number of useful guides on the blog, here are three we think are most useful. Head over to the blog to read and learn more.

 
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What is the Construction Industry Scheme (CIS)?

CIS (Construction industry scheme) is a tax law relating to work done by subcontractors for contractors in the UK.

It involves the contractor deducting CIS before paying each subcontractor invoice.

While this sounds confusing our guide to CIS should help demystify it!

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How do you send a winning invoice (and get paid faster)?

One of the things we are asked a lot at Powered Now is how can you create a professional looking invoice. asp what do I need to include on it?

Here are a couple tips on things that you will get you paid faster and should definitely be included on your invoice, all of which are easy to do in Powered Now!

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Getting more jobs

There has been a lot of chatter about some of the trade directories such as RatedPeople, MyBuilder and Checkatrade. We’ve pulled together our thoughts on how these sites can help you win more work as well as other useful articles on running your business.

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