VAT Connect – March 2017April 4, 2017
Getting the VAT rate right – make full use of the 5% reduced rate
If your business is involved in residential new-builds or conversions, are you overpricing/overcharging your customers and giving HMRC a windfall?
Value Added Tax is a consumer tax (on particular goods and services) designed to ‘stick’ with the Great British public. In the case of building your own home, converting a long-vacant dwelling or non-residential building into a home however, HMRC offer a mechanism to refund the consumer with the standard and reduce-rated VAT charged by builders and building suppliers. The ‘DIY Housebuilder’s Scheme’ and the 5% reduced rate of VAT exist with an underlying principle to encourage the regeneration of housing.
A key issue in getting the refund from HMRC however, is that the right rate of VAT is applied to the construction/conversion works. This issue was addressed in the recent First-Tier Tribunal case of Philip Hargreaves. Mr Hargreaves was charged 20% VAT on some of the services that should have been charged at the reduced-rate of 5%. Whilst HMRC refunded the 5% VAT amount, the Tribunal confirmed that it was the customer’s responsibility to recover the 15% overcharge from the supplier. Unfortunately, two of the businesses which had overcharged VAT were no longer VAT registered, leaving Mr Hargreaves out of pocket, and HMRC with an amount of VAT they should never have received.
Whether you’re a ‘consumer’ or a business, it is always better to consider the VAT rates and refund schemes available at the planning stage. If there’s an error discovered in the VAT after the supply, then there’s a risk to both the consumer and the business; the consumer in unnecessary costs, and the business in both cashflow and possible interest/penalties.
The Chancellor announced three points to note in respect of VAT during his Spring Budget on 8 March, including the potential to more to electronic ‘real time’ VAT collection.
In addition to the increase of the VAT registration and deregistration limits, which takes effect from 1 April (£85,000 and £83,000 respectively), the Chancellor announced two areas which are now open for consultation, both focussed on avoidance/fraud
- the technical ability for HMRC to extract the VAT element (‘split payment’) at the point of supply from goods bought by UK consumers via online stores. This is aimed at combatting the VAT evaded on goods sold by overseas sellers (consultation closes on 30 June 2017), and is a significant step into the future of VAT collection at the point of transaction, and
- the introduction of the reverse charge mechanism to the provision of labour in the construction sector. This would see the customer account for output tax rather than the supplier (i.e. the labour provider). The consultation also proposes changes to the administration of the CIS (Construction Industry Scheme), and is due to close on 9 June 2017.
We would encourage businesses affected by these proposals to provide feedback to HMRC.
VAT still due on agency staff supplies
The Upper Tribunal has agreed with the First-Tier Tribunal that VAT is due on all of Adecco UK’s supplies of staff. The ruling is of particular interest to businesses which cannot fully recover VAT (e.g. charities, banks, insurers).
In the original tribunal case heard back in November 2015, the First Tier placed onus on the ‘economic reality’ of Adecco’s supplies of temporary staff, and concluded that there was no difference between employed and self-employed temps provided to Adecco’s clients. Adecco had argued that VAT was only due on their commission, not the whole of the charge for the temporary staff.
Adecco appealed the original decision, stating that the ‘economic reality’ was inconsistent with their contractual position. In dismissing the appeal, the Upper Tribunal agreed with the First-Tier; Adecco’s temps could not work for their clients except with Adecco’s agreement, therefore Adecco were making a supply of staff, and VAT was due on the whole of the amount received.
Flat Rate Scheme – Limited Cost Test: update
For businesses using, or thinking about using the Flat Rate Scheme, the impact of the Limited Cost Test is now in effect.
Further to our articles in January and February’s VAT Connects, HMRC have updated their guidance to include the Limited Cost test which came into effect on 1 April 2017. Section 4 of Public Notice 733 Flat Rate Scheme for small businesses now contains information and examples regarding the test. It should be noted however, that “goods for disposal as promotional items, gifts or donations” are also excluded from the ‘relevant goods’ list (section 4.6), but this has not been reflected in HMRC’s guidance.
The online calculator is now live, and can be used to assist in testing whether the business will be caught by the higher 16.5% rate.
If you use the scheme and the next VAT return for submission to HMRC includes the month of April, then there is still time to test your position and leave the scheme if you are likely to get caught with a bigger VAT bill.
We need to talk about VAT…
The Office of Tax Simplification has released a consultation and want your help in simplifying the UK’s VAT system.
Following on from our article in January’s VAT Connect, the Office of Tax Simplification have released their VAT Interim Report. The report recognises that the UK’s VAT system has changed dramatically since its inception 45 years ago, and is seeking contributions from businesses and advisers to help develop ideas on how to achieve a sustainable VAT system that minimises the burden of this ‘simple tax’. Specifically, the OTS have identified several areas, such as the VAT registration limit, the various VAT rates, and accounting schemes (Flat Rate Scheme, Cash Accounting etc.). They have asked for
- evidence of difficulties and complexities,
- suggestions on how to improve matters, and
- any areas that could be simplified that they may have missed.
With the UK now set to leave the constraints of the European Union, this could be an ideal opportunity for UK businesses to widen HMRC’s understanding (and empathy) of this sometimes-burdensome tax. Our VAT Team will be meeting with members of the OTS in May, so if you have anything we might share with them, please contact us.
If any of these articles raise further questions for you, please contact any member of our VAT team.
Alan Davis – VAT Partner & Head of Tax
Alan Flavelle – VAT Manager
Fiona Baird – VAT Manger