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Tax implications for construction industry

If you run a construction business and secure the services of sub-contractors, or if you are a building sub-contractor, you will need to comply with a special set of tax rules collectively known as the Construction Industry Scheme (CIS). 

The CIS rules determine the tax and National Insurance treatment for those working in the construction industry. 

Under the scheme, contractors are required to deduct money from a sub-contractor’s payments and pass it to HMRC. The deductions count as advance payments towards the sub-contractor’s tax and National Insurance liabilities.

Contractors are defined as those who pay sub-contractors for construction work or who spent an average of more than £1m a year on construction over a three-year period. Sub-contractors do not have to register for the CIS, but contractors must deduct 30% from their payments as unregistered sub-contractors.

To avoid the 30% deduction, sub-contractors will need to register with HMRC and qualify for a 20% deduction or apply for gross payment status. If gross payment status is secured the contractor will not make a deduction and the sub-contractor will be responsible to pay all their tax and National Insurance at the end of the tax year.

The CIS covers all construction work carried out in the UK. Exceptions to the definition of construction work includes professional work done by architects and surveyors, carpet fitting, scaffolding hire (with no labour) and work on construction sites that’s clearly not construction. The CIS does not apply to construction work carried on outside the UK.

In addition, from 1 October 2020, sub-contractors will no longer 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 will be known as the Domestic Reverse Charge. The new rules will make the supply of construction services between construction or building businesses subject to the Domestic Reverse Charge. These rules were meant to come into effect from 1 October 2019 but have been delayed allowing the industry more time to prepare.

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Overdrawn directors’ loans

An overdrawn Director’s Loan Account is created when a director (or other close family members) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay the personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the Director’s Loan Account (DLA).

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create unwelcome tax and NIC consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 and the loan must be reported on the director’s personal Self-Assessment tax return. There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company.

Where certain DLA's are not paid off within nine months and one day of the company's year-end, there is an additional Corporation Tax (CT) bill of 32.5% of the outstanding amount. In most cases, this is not a permanent loss of revenue for the company as a claim can be made to have this CT refunded (but not interest) when the loan is paid back to the company. The claim to have the tax refunded needs to be made within 4 years after the end of the year in which the participator's loan was repaid.

The CT, Income Tax and National Insurance impacts of using a DLA must be carefully considered to ascertain if this is an efficient way for a director to ‘borrow’ money from their company.

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Filing deadlines for company accounts

The normal deadline for filing private limited company accounts is 9 months after the company’s financial year end, known as the accounting reference date. For example, many companies have a year-end date of 31 March and are therefore required to file their accounts by 31 December. For public companies, the time limit is 6 months from the year end.

The deadline for filing your first set of accounts with Companies House can be complicated. If the first set of accounts cover a period of more than 12 months, the filing deadlines are as follows:

  • Within 21 months of the date of incorporation for private companies
  • Within 18 months of the date of incorporation for public companies
  • Or (for either company type) 3 months from the accounting reference date, if this is longer than the above time limits. 

For example, a private company incorporated on 1 January 2019 with an accounting reference date of 31 January, has until midnight on 1 October 2020 (21 months from the date of incorporation) to deliver its accounts.

If the first set of private company accounts cover a period of 12 months or less, then the normal filing deadline applies.

There are automatic late filing penalties if your company accounts are delivered late. The penalties depend on how long has passed from the due date for payment and whether the company is private or public.

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Changes to Structures and Buildings Allowance

The new structures and buildings allowance (SBA) allows for tax relief on qualifying capital expenditure on new non-residential structures and buildings. The relief applies to the qualifying costs of building and renovating commercial structures.

The relief was introduced with effect from 29 October 2018 and applies where all contracts for the physical construction works are entered into on or after that date. The legislation to provide for this new relief was laid before Parliament and came into force on 5 July 2019 with retrospective effect.

As a result of the consultation process, some features have been amended, including those relating to short-term leaseholds, eligible pre-trading costs, periods of disuse, and reducing claimants’ administrative burdens.

The relief is available at an annual rate of 2% on a straight-line basis (over 50 years). No relief is available where parts of the structure qualify for other allowances, such as Plant & Machinery allowances.

The SBA is intended to support business investment in constructing new buildings, including necessary preparatory costs, and the improvement of existing ones, as well as improving the international competitiveness of the UK’s capital allowances system.

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Treatment of fees for nominee directors

A nominee director is someone who acts as a non-executive director on the board of a company. This person is normally appointed to act on behalf of another person or company and is effectively their representative on the board. For example, a shareholder, creditor or interest group. There can be conflicts of interest that arise for someone in this position.

Where a director of Company A is appointed to the Board of Company B as a nominee of Company A, and hands over his fees from Company B to Company A, those fees may be assessed on Company A rather than on the director provided certain conditions are satisfied.

These conditions (in Regulation 27 of the Social Security (Contributions) Regulations 2001) broadly mirror those laid out in Extra Statutory Concession (ESC A37), where an individual in receipt of fees paid in respect of a directorship can treat that income as trading income of a partnership or a company rather than as his or her employment income.

The Inspector dealing with the accounts of the company to which the fees are handed over, will decide whether those fees are to be treated as income of that company.

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Research and Development tax reliefs

There are two schemes for claiming relief for R&D expenditure. The schemes are known as the Small or Medium-sized Enterprise (SME) Scheme for smaller companies, and the Research and Development Expenditure Credit (RDEC) scheme for large companies.

Large companies can currently claim a 12% RDEC also known as an 'above the line tax credit' for qualifying expenditure. The 12% rate applies to expenditure incurred on or after 1 January 2018. The RDEC allows companies to claim an enhanced Corporation Tax deduction or payable credit on qualifying R&D costs. The RDEC replaced the large company scheme that was withdrawn in April 2016.

The SME scheme offers more generous reliefs. SMEs can currently claim R&D tax credits of 230% for expenditure. However, SMEs can elect to claim relief under the RDEC scheme if they are unable to claim relief under the SME scheme because of a grant or subsidy, or because they are carrying out subcontracted R&D work. A company is usually defined as an SME if staff headcount is less than 500 and either turnover is less than €100m, or balance sheet total is less than €86m.

If a company is seeking to develop or solve scientific or technological uncertainty for the benefit of their 'sector', then you may qualify for R&D tax reliefs. It should be noted that only certain costs are available for relief.

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Corporate Capital Loss Restriction

Under current rules up to 100% of chargeable gains can be set against carried-forward capital losses. For accounting periods ending on or after 1 April 2020, large companies and unincorporated associations who accrue chargeable capital gains will only be able to offset up to 50% of those gains using carried-forward allowable (capital) losses. The measure is subject to anti-avoidance rules that took effect from 29 October 2018.

There will be an allowance that means the first £5 million of profits can be offset with carried-forward losses before the 50% restriction is applied. This allowance is in tandem with the Corporate Income Loss Restriction (CILR). This will ensure that over 99% of companies are unaffected by the restriction. The new measure is expected to impact about 200 corporates each year who will pay additional tax as a result of this measure.

These rules are in line with the CILR for carried forward income losses that was introduced in 2017 and the new capital losses rules effectively mirror the income losses rules. Transitional rules will apply to companies with accounting periods that straddle the 1 April 2020 implementation date.

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Loss buying restrictions

Under qualifying circumstances, Corporation Tax (CT) relief is available where your company makes a trading loss. The trading loss can be used by offsetting the loss against other gains or profits of your business in the same or previous accounting period. The loss can also be set against future qualifying trading income.

However, there are restrictions on ‘loss-buying’. This describes the situation where a person buys a trading company wholly or partly for its unused trading losses rather than solely for the inherent value of its trade or assets. The new owner usually introduces new activity into the company to try to keep its entitlement to relief for losses.

The legislation governing this area can result in all the company’s unused carried- forward trading losses being cancelled where either:

  • within any specified period, there is both; a change in the ownership of a company, and a major change in the nature or conduct of a trade carried on by the company,

or

  • there is a change in ownership of a company at a time when the scale of its trading activities has become small or negligible.

For accounting periods beginning on or after 1 April 2017, the specified period is 5 years beginning no more than 3 years before the change in ownership occurs.

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Non-resident company liability to Corporation Tax

Under the current rules non-resident companies with a trading business in the UK are liable to pay UK Corporation Tax on their profits made through a permanent establishment/branch or agency. This includes trading income and any income from property or rights used by, or held by or for, the permanent establishment/branch or agency (except dividends or other distributions received from companies resident in the UK) as well as certain chargeable gains falling within TCGA92/S10B.

There are a number of differences in the taxation of non-resident companies as opposed to resident companies. For example, a non-resident company:

  • is not liable to account for ACT on distributions made before to 6 April 1999,
  • cannot have 'franked investment income',
  • cannot have surplus franked investment income for the purposes of ICTA88/S242,
  • cannot set trading losses against dividend income to augment its trading income for the purposes of absorbing losses brought forward.

Any UK-source income received by a non-resident company which does not carry on a trade in the UK through a permanent establishment/branch or agency is subject to UK Income Tax on any UK-source income. Any Income Tax due is calculated at the basic rate only without any allowances, subject to any applicable Double Taxation Agreement. It is expected that corporate landlords will become subject to Corporation Tax on their income and gains from 6 April 2020.

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Company Unique Taxpayer References

The Company Unique Taxpayer References (UTR) is the primary identifier for the company and should be used whenever HMRC is contacted and when tax returns are filed.

When a new limited company is registered, Companies House will inform HMRC of the new company and a UTR (ten-digit number) will be issued. HMRC will then issue a letter to the company's registered address outlining important information about registering the company online for Corporation Tax and filing Company Tax Returns.

The letter, which will be sent to the companies registered address, will also contain the company’s ten-digit UTR. The number can also be found on other documents issued by HMRC such as form CT603 ‘Notice to deliver a company Tax Return’, Depending on the type of document issued the reference may be printed next to the headings 'Tax Reference', 'UTR' or 'Official Use'.

It is possible to locate a company UTR by making a request online at https://www.tax.service.gov.uk/ask-for-copy-of-your-corporation-tax-utr.

HMRC will send the number by post to the company’s registered address as shown at Companies House.