VAT Round-Up
In this VAT round-up we pick up on a variety of VAT related topics. There are some that are frequently a source of errors in a taxpayers’ VAT records and others because they have been brought up by HMRC with clients on more than one occasion in recent months, which may indicate it is an area ‘under the spotlight’.
Rates of VAT on construction and the domestic reverse charge for buildings and construction
It is important for any of our clients who undertake construction projects at zero rate, reduced rate or a ‘mixed’ rate, where the project combines residential with commercial construction, to note that HMRC will want planning permission as the key evidence for using lower than the standard rate of VAT on these jobs. HMRC have also shown a keen interest in reviewing the calculation of a mixed rate on a project that combines residential with commercial construction, so it is important to keep these details for reference and where they can easily be produced in the event of a VAT inspection. If you are acting as a subcontractor to the main contractor it is still vital to have seen the planning permission and keep a record of it to back up your decision to apply a rate lower than standard rate. Even if the construction work will fall under the domestic reverse charge (‘DRC’) it is important at the outset of a project to determine the correct VAT rate as this will need to be shown on any invoices issued under the DRC.
If work is done under the zero rate for VAT then both the main contractor and any subcontractors can use the zero rate for qualifying construction work, including work undertaken to fit items that do not qualify as building materials (which are, as such, standard rated). If the main contractor is doing zero rated work for a housing association then any subcontractors should use the standard rate of VAT for their work as they are not directly supplying the housing association. If work is done at the reduced rate of VAT then any work undertaken to fit items that do not qualify as building materials will be standard rated. For work at the reduced rate, a subcontractor can use the reduced rate, except where the work is being undertaken by the main contractor under a certificate for either relevant residential purpose or relevant charitable purpose. This is because the subcontractor is not the holder of the certificate and must therefore use the standard rate of VAT.
The DRC has been in force just over three years and HMRC are no longer taking a ‘light touch’ approach to errors. The DRC does not apply to an ‘end user’ (someone who is not supplying construction services onwards), but an end user must make a written declaration to their supplier of their status as an end user. If you are supplying someone you believe to be an end user who has not given you a written declaration of their status you should use the DRC on your supplies. This is an area HMRC have been checking and will continue to do so.
Where a supply is one of labour only it is important for the supplier to be able to show that such supply is one of construction services if they use the DRC; HMRC are routinely asking a lot of questions to get justification that it was correct to use the DRC where a labour only supplier has applied it. If you are the recipient of a DRC invoice when the DRC should not have been used it is hard to see how HMRC could apply any financial penalty (unless they raise a penalty for ‘general regulatory breaches’, which is not a common occurrence) as no tax has been lost, but we have noticed that HMRC are questioning those who have accepted DRC invoices when the DRC should not have been applied, particularly in enquiries where they are looking at the quality of supply chain due diligence.
Aged creditors
In a few routine inspections in recent months, HMRC have checked that taxpayers are paying attention to repaying input tax claimed where payment to a creditor is still outstanding and more than 6 months overdue. This is the reverse side of claiming bad debt relief and is often inadvertently overlooked. Clients should ensure that their systems pick this up routinely on the VAT returns and make any repayments of input tax necessary in a timely manner.
Place of supply
If you are making supplies of staff to another business and those staff are undertaking the work outside the UK (noting that for VAT purposes the Isle of Man is within the UK, but the Channel Islands are not), then the VAT applicable is based on where your customer belongs. For this purpose, ‘belonging’ is based on the where the fixed establishment you are supplying is based, so if you are supplying a UK business which has no fixed establishment outside the UK then UK VAT applies as normal. But if you are supplying a business outside the UK (for example in Ireland or the Channel Islands), or a fixed establishment of a UK business where that establishment is outside the UK, then your supply will be outside the scope of UK VAT. If your supply is outside the scope of UK VAT, you should determine whether you have any responsibility for tax in the country where your supply is made. Often this will not present a problem as many countries will deal with it at their end under a reverse charge mechanism. If your supply is outside the scope of UK VAT due to the place of supply rules then the amount invoiced should still go in box 6 of your VAT return, and you can recover any input tax linked to that supply, subject to the normal rules for input tax recovery and any partial exemption restriction.
If you are making a supply related to land in a place outside the UK, such as construction services or installation of fixed machinery (and see others as in VAT Notice 741A section 7.4) then your place of supply for VAT will be where that site is situated. Depending on the country this could well mean needing to register for VAT there, so it needs careful consideration and research as it may affect the costs of doing the work even though it does not affect any tax liabilities in the UK.
When you receive a supply of services from a business outside the UK, you need to account for VAT in the UK under the reverse charge (see VAT Notice 741A section 5.2). For taxpayers who have no exempt supplies, the entries are equal and opposite, so although it is incorrect to miss out the reverse charge entries, it does not impact the VAT liability. However, if a business has some exempt supplies (for example makes some supplies of staff using the nursing agencies concession), then the full amount of VAT will need to be accounted for in box 1 of the return, but the input tax in box 4 will be restricted by the partial exemption rules. It is therefore very important for those clients for whom partial exemption is relevant to ensure that all receipts of services from businesses outside the UK are correctly recorded.
Conclusion
This newsletter picks up on just a handful of VAT areas where it is easy to make mistakes and where we have noted that HMRC have been checking on correctness of application in the course of routine inspections and non-routine enquiries. For further advice, assistance or information about any of these topics, or any other VAT topics, please contact the Chartergates team.
