Government to end free movement if a no-deal Brexit

If the UK leaves the EU without a deal in place on 31 October 2019, EU, EEA and Swiss citizens (and their family members) who are living in the UK by this date will still be eligible to apply for settled or pre-settled status under the EU Settlement Scheme and they will have until 31 December 2020 to do so.

Under Theresa May’s Government, in the event of a no-deal Brexit, temporary transitional arrangements were to be put in place for those EU, EEA and Swiss citizens arriving in the UK after exit day but on or before 31 December 2020. Under those transitional arrangements, EU, EEA and Swiss citizens would be able to come to the UK for up to three months to visit, work or study without applying for a visa. However, those who wished to stay in the UK for more than three months, would need to apply to the Home Office for the new status of “European Temporary Leave to Remain” (ETLR) and they would need to apply within three months of entry. ETLR was to be valid for a maximum of three years and would allow work and study, but it would not lead to indefinite leave to remain in the UK. A new immigration system would then take effect from 1 January 2021. Irish citizens do not need to obtain settled status and would not need to apply for ETLR.

However, the new administration, under new Prime Minister Boris Johnson, has now stated that the UK is leaving the EU on 31 October 2019 come what may, and that free movement will end immediately if the UK leaves without a deal. In the event of a no-deal Brexit, it is therefore seeking to introduce a new immigration system to take effect immediately from exit day, abandoning the proposed ETLR arrangements set out above. With only just over two months to go until exit day, there is no indication yet about what the requirements of this new immigration system will be. The Home Office has said that the new plans are being developed and will be announced shortly. In the meantime, it has confirmed that EU, EEA and Swiss citizens will still be able to come to the UK on holiday and for short trips, but what will change is the arrangements for them to come to the UK for longer periods of time and for work and study. 

As a precaution, if you currently employ any EU, EEA and Swiss citizens who have not yet applied for settled or pre-settled status, you should advise them to do so before 31 October 2019, particularly if they intend to travel outside the UK after that date, so as to reduce possible difficulties in verifying their UK immigration status on re-entry. At the same time, in the event of a no-deal Brexit, any EU, EEA or Swiss citizens proposing to relocate to the UK for work after 31 October 2019 should not assume they will be able to do so without prior immigration permission. This means UK businesses currently have no idea whether they can recruit EU, EEA and Swiss citizens for vacancies with a start date after exit day. Finally, it is also not now clear how right to work checks are to be made on EU, EEA and Swiss citizens immediately after exit day in the event of a no deal. 

A reminder of the ‘badges of trade’

The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side-line to a hobby. Careful consideration needs to be given to deciding whether a hobby has become a taxable activity.

Both HMRC and the courts are clear that it is important to look at the whole picture rather than looking at each 'badge' in isolation when deciding.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance.

The importance of a written contract

The importance of having a written contract when deciding employment status should not be understated. Failing to make proper provision for written contracts can mean relying on oral agreements, which are obviously much harder to prove. Having a written contract can provide certainty to both parties and help avoid disputes or at the very least make it easier to handle any disputes that arise.

HMRC manuals say that where there is a written contract, the Courts will decide employment status based on the written contractual terms and on the factual matrix that existed when the contract was made. Generally, the Courts will not refer to evidence other than the written contract (for example, they will not refer what the parties did in practice).

Exceptions to this are where:

  • the contract is not comprehensive (other terms and conditions then have to be established from other evidence),
  • one or more of the written terms have been varied by agreement,
  • one or more of the written terms are a sham.

In contrast, where there is no comprehensive written contract, the Courts regard employment status as a question of fact or a mixed question of fact and law. The Courts will not disturb a Tribunal decision based on fact unless they think it is perverse.

New CGT rules for homeowners

Currently, if a property has been occupied at any time as an individual’s main private residence, the last 18 months of ownership are disregarded for CGT purposes. This relief applies even if the individual was not living in the property when it was sold. From April 2020, this final exempt period will be reduced from 18 months to 9 months. There will be no change to the 36 months exempt period available for those that are disabled or moving into care homes.

Effectively, this change has already started as the 9-month rule will have retroactive effect for any sale that takes place on or after 6 April 2020. If a homeowner starts letting their house out now, leaves it empty or moves out, they can be caught out by the new rules if they do not sell the house until next April. This means the homeowner could be presented with an unexpected CGT bill.

The intention of this relief was to protect those who had difficulty selling their original home after purchasing a new home. However, the long exemption period allows all qualifying homeowners to accrue CGT reliefs on two properties at the same time. The Government is concerned that this relief is being used by some homeowners / landlords who intentionally hold on to a property they have lived in to benefit from the CGT reliefs available.

Blind Person’s Allowance

The Blind Person’s Allowance is an extra amount of tax-free allowance made available to those who are eligible. The allowance for the current 2019-20 tax year is £2,450. If both spouses / civil partners are eligible, they will both get an allowance. An eligible claimant can transfer their allowance to their spouse or civil partner if they do not pay tax or cannot use all of the allowance.

The eligibility rules vary.

In England and Wales, you can claim Blind Person’s Allowance if both of the following apply:

  • you’re registered with your local council as blind or severely sight impaired,
  • you have a certificate that says you’re blind or severely sight impaired (or a similar document from your doctor).

In Scotland and Northern Ireland, you can claim Blind Person’s Allowance if both of the following apply:

  • you cannot do work for which eyesight is essential,
  • you have a certificate that says you’re blind or severely sight impaired (or a similar document from your doctor).

The Royal National Institute of Blind People (RNIB), recently challenged a tax decision by HMRC that refused to transfer the allowance because one person in each couple was living in a care home. HMRC had said that their guidance only allows Blind Person's Allowance to be transferred where a couple is 'living together'.

The RNIB successfully challenged this decision on the grounds that 'living together' for Income Tax purposes includes couples where one of them is living in a care home. HMRC has also agreed that a 575 form to transfer the Blind Person’s Tax Allowance between spouses and civil partners will no longer be required.

VAT changes for CIS Sub-contractors

Important changes to the VAT rules for building contractors and sub-contractors are coming into effect from 1 October 2019. In a nut-shell, if you are subject to the Construction Industry Scheme (CIS) and if you are registered for VAT, from the 1 October 2019 you may need to change the way you account for VAT on supplies between sub-contractors and their contractor customers.

At present, sub-contractors registered for VAT are required to charge VAT on their supplies of building services to contractors. From 1 October, this approach is changing and sub-contractors will not add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers.

This does not mean that contractors, in most cases, are paying their sub-contractors’ VAT as an additional cost. When contractors pay their sub-contractors’ VAT to HMRC, they can claim back an equivalent amount as VAT input tax; subject to the usual VAT rules. Accordingly, the two amounts off-set each other.

The change is described as the Domestic Reverse Charge (DRC) for the construction industry. It has been introduced as an increasing number of sub-contractors have been registering for VAT, collecting the VAT from their customers, and then disappearing without paying the VAT collected to HMRC.

However, the change to DRC may create cash flow issues especially if you use the VAT Cash Accounting Scheme or the Flat Rate Scheme. We recommend that all affected CIS readers contact us so we can help you make the necessary changes to your invoicing and accounting software and reconsider the use of VAT special schemes if your continued use would adversely affect your cash flow.

Deregistering for VAT

A compulsory VAT deregistration is usually required if you:

  • Stop making taxable supplies
  • Sell your business
  • Change legal status
  • Disband a VAT group
  • Join a VAT group
  • Join the agricultural flat rate scheme

A voluntary VAT deregistration can be made if you do not expect your taxable turnover to exceed the VAT deregistration limit. The current deregistration limit is £83,000. 

You will be required to submit a final VAT Return for the period up to and including the VAT deregistration date.

You must account for any stock and other assets you have on this date if:

  • you could reclaim VAT when you bought them,
  • the total VAT due on these assets is over £1,000.

You can also make late claims for input tax on invoices received relating to the period that you held a VAT registration. This can be done after the final VAT return has been submitted (subject to the usual VAT time limits).

How dividends are taxed

The dividend tax allowance was introduced in April 2016. It replaced the old dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018.

The tax rate for dividends received in excess of the dividend tax allowance are taxed at:

  • 7.5% for basic rate taxpayers,
  • 32.5% for higher rate taxpayers, and
  • 38.1% for additional rate taxpayers.

It should be noted that dividends falling within your Personal Allowance, do not count towards your dividend allowance and you may pay tax at more than one rate.

If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income.

Do you trade with EU companies?

The new Chancellor, Sajid Javid, has stepped up plans to help ensure businesses are ready to trade post-Brexit if the UK leaves the EU without a deal. If you trade goods with the EU then you will be responsible for making customs declarations, as is the case for businesses currently exporting goods outside the EU.

To do this, you must have a UK Economic Operator Registration and Identification (EORI). HMRC has been warning businesses for some time of the importance of obtaining an EORI number, but less than half of the businesses that need a number have applied for one.

Following the Chancellor’s intervention, HMRC has now started writing to businesses that have not yet applied for an EORI number. In these letters, HMRC is automatically allocating EORI numbers to some 88,000 businesses across the UK. If you have not yet applied for an EORI number, you should look out for a letter from HMRC allocating you an EORI number. All the letters from HMRC are expected to be sent by the end of the first week in September.

If the UK leaves the EU without a deal, you will need an EORI number to move goods into and out of the UK. This identification number will be required even if you use a customs agent to assist in making customs declarations.

If you deal with customs processes of EU Member States, you will also need to get an EU EORI number too. An EU EORI is valid across the entire EU, and you can get this from the EU member state you are trading with. If you have a subsidiary company that also trades goods with the EU, they will need to apply online for a UK EORI as these cannot be given automatically by HMRC.

Tax Diary September/October 2019

1 September 2019 – Due date for Corporation Tax due for the year ended 30 November 2018.

19 September 2019 – PAYE and NIC deductions due for month ended 5 September 2019. (If you pay your tax electronically the due date is 22 September 2019)

19 September 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 September 2019. 

19 September 2019 – CIS tax deducted for the month ended 5 September 2019 is payable by today.

1 October 2019 – Due date for Corporation Tax due for the year ended 31 December 2018.

19 October 2019 – PAYE and NIC deductions due for month ended 5 October 2019. (If you pay your tax electronically the due date is 22 October 2019.)

19 October 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 October 2019. 

19 October 2019 – CIS tax deducted for the month ended 5 October 2019 is payable by today.

31 October 2019 – Latest date you can file a paper version of your 2019 self-assessment tax return.