The Government has (19 May) published a consultation on changes to the Basic Payment Scheme (BPS) to support farmers through the agricultural transition period from now until 2027 which will deliver a better, fairer farming system in England.

The consultation will be open for 12 weeks and focuses on two key areas:

Lump sum exit scheme – Building on evidence that some farmers would like to retire or leave the industry but have found it difficult to do so for financial reasons, the Government proposes to offer them a lump sum payment to help them do this in a planned and managed way. The consultation seeks views on who should be eligible for these lump sum payments and how the payments should be calculated.

Delinked payments – Direct Payments currently made through the Basic Payments Scheme offer poor value for money and are based on how much land a farmer has, which inflates rent and can stand in the way of new entrants. The Government plans to phase Direct Payments out over a gradual seven year transition period, to move to a fairer system. The consultation includes plans to separate the payment from the amount of land farmed, from 2024. This will simplify the process for farmers, allow them to focus on running their business and encourage them to take up the government’s new environmental land management schemes, which will reward sustainable food production and environmental improvements. The consultation seeks views on how the ‘delinked’ payments will be calculated.

A vibrant farming industry also needs to attract new talent and create more opportunities for new entrants and farmers wishing to expand their businesses. The Government is working together with industry leaders, local councils, land owners and new entrants to co-design a scheme to create real opportunities for new farming businesses. The new scheme will be available to support new entrants from 2022. Recommendations for the design of the scheme will be shared later in the year.

Environment Secretary George Eustice said:

We need to address the twin challenges of helping new entrants fulfil their dream and gain access to land, while also helping an older generation retire with dignity.

Our exit scheme will offer farmers who want to exit the industry all of the area payments they would likely have received until the end of the transition period in a single lump sum. It gives them a real incentive to confront what can often be a difficult decision and will help them clear bills and settle debts.

By renting out their farm or surrendering their tenancy, those exiting the industry will create important opportunities for the next generation of farmers and later this year we will be saying more about our plans to work with County Farm estates and other land owners to ensure that we nurture the right conditions for new enterprises to flourish.

This follows last year’s announcement of the Agricultural Transition Plan – the Government’s landmark plans to reward farmers and land managers for sustainable farming practices, which will see the introduction of a new, fairer system, co-designed with industry, that is tailored in the interests of English farmers.

The proposals within the consultation seek to offer a fairer system for farmers, encouraging generational change by providing more flexibility for new entrants to start up their farm businesses and supporting those who are ready to leave the sector to do so on their own terms.

The Government is taking steps to develop and co-design each element of the future system in partnership with industry. The consultation launched today seeks feedback on the proposed design of the lump sum exit scheme. At the same time, work is underway to design the New Entrant Scheme and just last month, farmers looking to continue farming were encouraged to take their first step towards a greener future by expressing their interest in participating in the national pilot of the Sustainable Farming Incentive. The application window for this has closed , with successful applicants expected to be invited to make a formal application to begin agreements starting in October shortly.

The proposals set out today also build on previous steps that have been taken to simplify the Basic Payment Scheme, including simplifying penalties for small overclaims of land from the 2020 scheme year, the removal of EU greening requirements which required farmers to carry out specific practices to qualify for additional payments but historically delivered little for the environment, and improving the arrangements for farmers with land in more than one part of the UK, from the 2021 scheme year.

The consultation will close for responses on 11 August 2021. A full report on the responses to the consultation will be published later in the year.

The mortgage guarantee scheme that was announced March 2021 is intended as a temporary measure. It is open for new mortgage applications from April 2021 to December 2022, in line with the government’s view that the current scarcity of high loan-to-value lending is primarily a response to the pandemic rather than a symptom of a longer-term structural change in the mortgage market.

The government will review the continuing need for the scheme towards the planned end date and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.

The scheme is designed to help creditworthy households struggling to save for the higher mortgage deposits required by lenders in the current environment. For this reason, a mortgage eligible for a guarantee under the scheme will need to:

• be a residential mortgage (not second homes) and not buy-to-let
• be taken out by an individual or individuals rather than an incorporated company
• be on a property in the UK with purchase value of £600,000 or less
• have a loan-to-value of between 91 per cent and 95 per cent
• be originated between the dates specified by the scheme
• be a repayment mortgage and not interest-only and
• meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test.

The scheme is also designed to ensure that lenders cannot use the government guarantee to restructure the riskiest part of their existing loan book, and that borrowers remain the beneficiaries of the intervention.

The scheme will help to ensure the mortgage market provides options for consumers with smaller deposits who also want a mortgage with the security of predictable repayments for a longer period. For this reason, it will be a requirement that any lender participating in the scheme must offer a five year fixed rate product as part of their range of mortgages offered under the guarantee.

See the bottom of this article for details of a free Webinar hosted by Xero (you don’t need to use Xero to access this webinar)

What is the VAT reverse charge?

The government is changing the way that HMRC collects VAT payments.
Until now, businesses in the construction industry would usually charge VAT when selling their materials or services, regardless of whether they are dealing with clients, contractors, subcontractors, etc.

As of March 1^st, 2021, suppliers will not be allowed to charge VAT unless they are supplying services to an “end-user”. For those transactions, they must only invoice for and collect the amount excluding VAT. Instead of paying the VAT to the supplier, the customer will pay the VAT directly to HMRC.

Who is classed as an “end-user”?

Final customers are referred to as “end users” in the guidelines. Anyone who will either use, rent or sell the structure in question is an end-user, so for example:

• Landlords
• Developers
• Domestic householders
• Local authorities
• Utility companies

Of course, this is made a little more complicated by the fact that “intermediary suppliers” are also treated as end-users, so if you deal with those, you can continue to charge them VAT too.
Your customer should confirm in writing that they are an end-user. (See Example End User Statement)

HMRC’s technical guide offers some further clarification on this distinction and what you should do to determine how your customers should be classified.

Download Flow Chart PDF

1. Read the government’s official advice.

We highly recommend scanning through the guidance published by HM Revenue & Customs for a better understanding. There are a lot of pointers there which are specific to different situations.

2. Talk to CGA

You will also be able to get more personalised advice CGA.   We can help you understand what the biggest impact will be on your business, given the way you work and what steps you should take.   

3. Consider how you handle your VAT returns.

It is common for contractors to do their VAT returns on a quarterly basis. If that is what you do, consider changing to monthly. Although it might require more admin in the short term, this may help balance out the effect on your cash flow.

4. Update your invoicing system.

You will need to review your invoices and potentially remove VAT from a lot of them moving forward. Make sure this is as systemised and automated as possible!

Invoices sent after 1 March 2021 will need to contain wording explaining that they are reverse charge invoices and will look something like our example.

They will not show VAT in the columns which calculate the payment to be made. On the following page there is an example invoice where no end-user certificate has been supplied.

See the example invoice.

The example invoice is not prescriptive – legally you do not have to show the VAT number of the customer, but it evidences that you have checked that they are registered and is good practice.

Your software system may not let you calculate the VAT that is being reverse charged and print it outside the accounting column. If you cannot show it, don’t worry. The recipient of the invoice will have to do the calculation themselves.

Use your software system to record as much information about your customer/supplier as possible.

What is important is that your invoice does not charge VAT and clearly shows that it is a reverse charge invoice and S55A applies.

5. Write to your subcontractors.

When your subcontractors invoice you for their services, they can no longer charge you VAT under the new rules, because you will owe it to HMRC directly instead. We suggest writing to them to confirm this, advise them on where to go for more information, and maybe offer to discuss further if needed. (See example letter to sub-contractors)

6. Write to your Customers (Intermediaries and End Users) – You need to establish if your customer is an intermediary or end user – they may be both.

See example letter to customers.

In deciding whether you are working for an end user you must ask yourself who you are actually contracted with, who are you expecting to pay you. Do not think about the final client if you will not be directly contracted to or paid by the final client. Ask yourself, is the firm that you work for going to be the end user of that building or construction activity?

Sometimes you will contract with a group company that is acting for another company in its own group as a property procurement company, it is an intermediary for the end user.
Sometimes you will work for a landlord who is acting for a group of tenants to procure and organise work.

The tenants are the end users and the landlord is an intermediary.

If a business is acting as an intermediary and is VAT registered and CIS registered and the work you are doing is standard rated construction work, you must reverse charge VAT unless the intermediary gives you an end user statement.

Intermediaries acting for groups or for tenants are allowed to issue end user statements. If they give an end user statement there is no need to question it or to enquire about the structure of the group companies, or the landlord tenant contract in any detail – if you hold an end user statement you must charge VAT.

FREE Webinar – Managing Reverse Charge VAT and CIS

Next week, on 26th February at 10am Xero are running a free webinar for construction businesses, outlining the Reverse Charge VAT changes and giving tips on how to prepare. This session is open to all construction businesses, regardless of whether they currently use Xero. 

We welcome you to join by clicking this registration link 

The 45 minute webinar will cover:

• What Domestic Reverse Charge VAT is 
• How it will affect both contractors and subcontractors
• How to prepare for the mandatory change 
• How Xero can help manage Domestic Reverse Charge VAT and CIS 

This is the 3^rd attempt at setting a date for the introduction of these changes and as it stands at the moment this date will not be changed.

It applies only to VAT-registered businesses who are supplying/receiving services that are reported under CIS.

In other words, it applies to services supplied between the majority of construction sub-contractors and contractors in the UK.

If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.

If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual).

If you’re not VAT registered, you should make it clear to the supplier in writing.

Crucially, reverse charges do not contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.

Notably, the reverse charge also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.

For sake of clarity, HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless the answer to all of the following questions is positive:

• Are any of the supplies you are making within the scope of the CIS?
• Is the supply standard or reduced-rated?
• Is your customer VAT registered?
• Will your payment be reported under CIS?
• Are you sure the customer is not an end user?

Introduction of the VAT domestic reverse charge for construction

Many businesses use VAT payments from customers as a source of working capital before sending the funds to HMRC.

But from 1 March 2021, VAT cash will no longer flow between VAT registered businesses involved in the construction industry.

The UK government is rolling out a reverse charge initiative aimed at tackling fraud totalling millions of pounds per year.

This is caused when suppliers or ‘subcontractors’ charge main contractors VAT but ‘disappear’ before passing sums on to HMRC.

The VAT reverse charge rules apply to suppliers of specified services, reported under the CIS.

The changes also apply to goods, where those supplies are provided alongside services specified in the CIS. This will see many more businesses affected than first thought.

It is anticipated that the businesses most directly affected by the building and construction legislation will be those which supply services to main contractors, or that operate through recruitment agencies or umbrella companies.

How does the domestic reverse charge work?

Suppliers will no longer be required to charge or receive VAT from their main contractor customers.

Instead, main contractors will effectively charge themselves VAT on subcontractors’ services, and pay the VAT sums that would have been paid to the subcontractor direct to HMRC in their VAT returns.

From 1 March 2021, for impacted suppliers, subcontractors will need to issue domestic reverse charge VAT invoices to main contractors, which must include wording that reverse VAT rules apply and that the customer must account for the VAT.

This requirement applies through the supply chain until main contractors sell to end users (clients) who do not sell on services.

The new arrangements will only apply to:

• Individuals or businesses registered for VAT in the UK, which sell to other VAT-registered businesses
• Entities that provide services specified under CIS. These include the construction, renovation and demolition of structures; painting and decorating, as well as services such as heating, ventilation and air conditioning.

The arrangements do not apply to businesses providing other support services such as surveying, architecture and consultancy; machinery, drilling or extraction, and the installation of security systems.

HMRC covers a full breakdown of services are that are included and exempt under CIS.

Check when you must use the VAT reverse charge for building and construction services

When you must use the reverse charge

You must use the reverse charge for the following services:

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
• painting or decorating the inside or the external surfaces of any building or structure
• services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

When you must not use the reverse charge

Do not use the charge for the following services, when supplied on their own:

• drilling for, or extracting, oil or natural gas
• extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
• manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
• manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
• installing seating, blinds and shutters
• installing security systems, including burglar alarms, closed circuit television and public address systems

Flowchart to help you decide whether to apply normal vat rules or to apply the domestic reverse charge

Flowchart for businesses receiving building and construction services to check whether normal VAT rules or the domestic reverse charge applies

Supplier checks

A builder selling construction services must first be sure that his customer is both CIS and VAT registered.

It is recommended that the customer’s VAT number is checked by using HMRC’s new VAT number checker service. It might be worthwhile making this check an annual task, just in case the customer has deregistered during the year, perhaps due to reduced turnover.

A potential difficulty is when the customer is in the process of applying for a VAT number from HMRC. In this situation, you should consider the advice given in VAT Notice 735, para 9.3.2, which is to request a 20% advance deposit from the customer to cover the potential output tax liability if things go wrong.

The HMRC guidance advises: “Any deposit taken in these circumstances can be refunded when they can show evidence that they’ve got their VAT registration number.”

Customer checks

The challenge is to make sure that reasonable steps have been taken to check a customer is bona fide. A lot of this process comes down to common sense. If your client is doing business with a new customer, a due diligence process should have been carried out as part of the commercial decision to take on that customer.

HMRC has confirmed that a builder who has been deliberately misled by a customer but has taken reasonable steps to check their credibility will not be held responsible for underpaid output tax. The ‘reasonable steps’ issue is well-summarised by para 9.3.1 of VAT Notice 735.

Three points to remember

There are three priorities for those who are buying in building services from March onwards.

• Incorrectly charged VAT – Make sure that you are not charged VAT by a builder when the reverse charge should apply. You can still claim input tax in Box 4 but HMRC has the power to assess output tax for the same amount, as if the reverse charge had been carried out correctly. 
• Nature of work -Check that the work comes within the scope of the CIS and that the supplier is providing building services, but is not an employment business which is only making a supply of staff rather than construction services. Supplies by an employment business are subject to normal VAT rules.
• End user or intermediary supplier -The final check is for customers to advise their builders before work starts if they qualify as either an ‘end user’ or ‘intermediary supplier’ for any of the work in question, as I explained in Domestic Reverse Charge: The final countdown for builders.

Conclusion

As with many issues in tax, advance planning is the key to reducing the risk of errors.

• make sure your accounting systems and software can deal with the reverse charge
• consider whether the change will impact your cash flow
• make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work

The aim of the new rules is to reduce the incidence of VAT fraud in the construction industry – don’t play into the hands of the fraudsters by having weak checking procedures.