VAT: A new reverse charge for building and construction services

The Government has published a final version of the draft legislation, in the form of a statutory instrument, which will introduce a VAT domestic reverse charge (DRC) for building and construction services with effect from 1 October 2019. A tax information and impact note has also been published. Read more here. If you supply or buy building services (see Type of Work Affected below) your VAT accounting will be affected by this measure.

The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. The domestic reverse charge will only affect supplies at the standard or reduced (not zero) rates where payments are required to be reported through the Construction Industry Scheme (CIS). Under the DRC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.

The DRC only applies to other construction businesses which then use them to make a further supply of building services, and not to ‘end users’ End users are those who receive building and construction services for their own use and do not supply those services on along with other building and construction services e.g. private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.

Type of work affected

Despite the rather misleading reference to ’construction’ the DRC will, in fact, apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.

Excluded works

Some works will not be covered and invoicing for these will not change. These include

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Mixed supplies

The DRC is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.

In addition, if there has already been a DRC supply on a construction site, if both parties agree, any subsequent supplies on that site between the same parties can be treated as DRC supplies. HMRC say this should reduce doubt and speed up the decision making process for both parties.

If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, HMRC state that it is recommended that the DRC should apply.

Issues to consider and preparation

The idea of having draft legislation and guidance out now is to allow businesses a long lead in which to make the necessary changes to systems, prior to implementation on 1 October 2019. Both suppliers and customers will need to ensure that VAT accounting systems under the Making Tax Digital proposals can cope. This is a period in which businesses will also be coping with or preparing for Brexit. At present there is little information on what neds to be done in relation to projects that are in progress when the measure comes in, but it is likely that services with a tax point date after 1 October 2019 will be accounted for under the new rules – so projects which span that date will have two different VAT accounting treatments.

Suppliers in the building trades

One of the main concerns is the burden for suppliers will be identifying customers who are liable for the RC – i.e. checking VAT registration numbers and obtaining evidence that a customer is an ‘end user’ or not, so that VAT, if due, is invoiced correctly. Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly. Traders accustomed to using VAT on sales in their cash flow projections will also need to adjust.

Suppliers will be required to issue DRC invoices which clearly state that the supply is subject to DRC and to provide a breakdown of the value of work at different VAT rates, to allow the customer to account for VAT correctly.

Recipients of reverse charge services

All VAT registered recipients of sub-contracted services will need to ensure they apply the DRC correctly. Output VAT wrongly applied on an invoice by a supplier can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the DRC could lead to error penalties.

The HMRC guidance states that “it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.”

More controversially, the guidance also says, “if the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge”. We are not convinced this is legally correct, but it will be in the interests of all end users to ensure that the DRC position is clear. It will be necessary for recipients to have a means of identifying DRC invoices in their accounting systems so that the right output tax is declared to HMRC. Input tax on the DRC will be subject to the same rules as now- i.e. it will only be deductible if it relates to the recipient’s taxable business activities. Charities and other not for profit organisations should be particularly aware of this.

Reverse charge VAT and charities with non-business actvities

A recent First Tier Tribunal (FTT) decision may be very important for charities and other entities which have both business and non-business activities, and are receiving services from outside the EU in respect of the non-business activities.  As the amounts involved in this case are significant it will almost certainly be appealed, but charities which are receiving services (not just investment management) from outside the EU in respect of their non-business activities (such as non-business research or grant funded projects) should consider their position further and if necessary make protective claims to HMRC.

Wellcome Trust Limited (WTL) makes payments to non-EU overseas investment managers relating to the management of WTL’s investment portfolio. In a previous ECJ case it had been confirmed that the management of charitable investments by WTL i.e. the buying and selling of shares, was a non-business activity. It follows that WTL is not entitled to deduct any VAT it may incur on  management of those investments. Where such fees are charged by a UK investment manager (the place of supply thus being the UK) WTL could not deduct VAT.

However, where services are received from outside the EU, the question arises as to whether the place of supply is outside the UK (in which case no VAT applies) or is within the UK under the reverse charge rules, such that WTL must account for UK VAT on the value of the services to HMRC. Article 43 of the Principal VAT Directive states that ‘a taxable person who also carries out activities or transactions that are not considered to be taxable supplies of goods or services shall be regarded as a taxable person in respect of all services rendered to him’. Article 44 then treats the supply of services made to a taxable person ‘acting as such  ’as being made where the taxable person receiving the service belongs. Article 45 provides that services supplied to any person acting in a private capacity are made where the supplier belongs.

Since 1st January 2010, WTL had been accounting for output tax in the UK in respect of investment management services it purchased from non-EU suppliers. It claimed repayment of that VAT, amounting to c£13m, and HMRC refused the claim.

HMRC considered the place of supply to be the UK under Art. 44, so that WTL was right to account for VAT under the reverse charge provisions, whilst WTL asserted the place of supply to be outside the UK and thus UK VAT under the reverse charge is not due. WTL’s argument was that the words ‘acting as such’ in Art. 44 took the Trust out of the requirement to account for VAT on investment management services supplied to it from outside the EU. It was agreed that WTL was not acting in a private capacity so Article 45 was not relevant.

HMRC considered that all taxable persons must fall into either Art. 44 or Art. 45. As it was agreed WTL was not within Art 45 they argued that WTL must account for reverse charge VAT under Art 44 and that the words “acting as such” did not have any effect.

The FTT disagreed. There was a ‘gap’ between Art 44 and Art 45 and that the words ‘acting as such’ excluded WTL from a requirement to account for VAT under Art 44 to the extent that the services received are  for the purposes of its non-economic business activity. The FTT found that there is nothing in the provisions which requires someone to fall within either Article 44 or 45.

Please contact us for further information if you are receiving any services from outside the EU in relation to non-business activities.

 

HMRC announce postponement of MTD for some charities and others

On 16 October 2018 HMRC announced that mandatory compliance with MTD for VAT will be postponed for 6 months for VAT registered businesses which have more complex requirements until 1 October 2019. The MTD VAT pilot will be open for these ‘deferred’ businesses in Spring 2019. The 6-month deferral applies to those who fall into one of the following categories:

  • Trusts
  • ‘Not for profit’ organisations that are not set up as a company,
  • VAT divisions
  • VAT groups
  •  Public sector entities that are required to provide additional information on their VAT return (Government departments, NHS Trusts),
  • Local authorities,
  • Public corporations,
  • Overseas based traders
  • Traders who are required to make payments on account
  • Annual accounting scheme users

If your VAT registered business is trading over the VAT registratoin threshold and you do not fall into one of the deferred categories you must keep records digitally and use software to submit VAT returns from 1 April 2019. Those in the deferred categories should be able to access a pilot scheme in early 2019, but are not eligible for the current MTD pilot process, announced on 16 October 2019.

Charities

The date charities are able to join the MTD VAT pilot and are required to comply with the MTD VAT rules depends on their individual circumstances and whether they fall into one of the deferred categories. For example, a charity that is :

  • a not for profit organisation that is set up as a company is mandated for MTD VAT from 1 April 2019, unless they fall into one of the deferred categories (e.g. VAT group)
  • a trust or a not for profit organisation not set up as a company is mandated for MTD VAT from 1 October 2019.

The Charity Tax Group ( CTG) reports that HMRC is still reviewing whether mandation for CIOs and SCIOs will be deferred or not. Also disappointingly, HMRC have confirmed to CTG that there is no change to the “soft landing” regarding digital links requirements, which covers VAT periods commencing between 1 April 2019 and 31 March 2020. This will mean that charities with deferred status, which do not participate in the pilot process, will have less time to adapt to the new rules.

CTG states that for most charities it should not be too difficult to comply with the first stage of Making Tax Digital (where only an API connection is required to send VAT data to HMRC), for example by using bridging software from spreadheets, but that the requirement to implement digital links could be a lot harder.

The advice we and CTG are giving to all charities is to start preparations for MTD now, read HMRC’s Notice and to talk to your software providers ASAP to find out what products they will be offering.

CIOT and ICAEW issue BREXIT Factsheets

The Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) have issued the first in a series of fact-sheets on the impact of the UK’s withdrawal from The European Union. The main purpose of the first fact-sheet is to outline the purpose and effect of The Taxation (Cross-border Trade) Act 2018, which received Royal Assent on 13 September 2018.

ADR agreements with HMRC do not always give taxpayers certainty

ADR agreements do not always give taxpayers certainty

The First Tier Tribunal decision in the case of The Serpentine Trust Ltd (‘TST’) http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10680/TC06719.pdf  illustrates how an Alternative Dispute Resolution (ADR) agreement with HMRC may not necessarily give certainty to a taxpayer even though both parties have agreed its terms.

TST ran five supporter schemes under which supporters made payments in return for a range of benefits. During a VAT inspection, HMRC raised various points and identified that in respect of four of the schemes, TST was not accounting for VAT, but was treating the payments made by the supporters as donations. The fifth scheme (the Council Scheme) was subject to a ruling from HMRC in 2003 which allowed that if TST identified a value for the benefits, on which it accounted for VAT, and a value for a donation, the donation element was treated as outside the scope of VAT.

A series of ADR meetings were held to seek agreement on the points in dispute. All points were agreed, including the treatment of supporter schemes with effect from 1 April 2013.The agreement between HMRC and TST in relation to supported schemes stated “From 1/4/13 where the value of the ‘benefits’ package for supporter schemes is identified and this is clearly stated (both in the application forms and on the website), this will be treated as the consideration. Any sums paid above the price charged for the benefits package is to be treated as a donation.”

For periods before 1 April 2013, HMRC assessed TST for VAT on total supporter scheme income and TST appealed to the First Tier Tribunal (‘FTT’). The FTT upheld the assessment finding that TST was making a single standard rated supply of the right to take part in various events organised by TST in return for the total payment. However, in making her decision, the Judge expressed surprise that a mere change of wording in the Taxpayer’s literature was sufficient to mean that after 1 April 2013 the VAT liability was confined only to the portion of the income which corresponded to the benefits supplied to Scheme and commented that:

“The Trust is of course entitled to rely on the clearances it has been given by HMRC, even when they are, as they appear to be in this case, wrong in law. I express the view that it is inappropriate for HMRC to give private rulings inconsistent with their published position.”

The reference to HMRC’s published position was a reference Notice 701/1 in which HMRC state that it must be clear to supporters that the benefits of membership can be purchased by paying only the minimum payment (benefit value).

Three months after the first FTT decision, HMRC withdrew the Council Scheme ruling allowing TST to account for VAT only on the benefits value, and seven months after the decision, HMRC wrote to TST advising that TST may have ‘misunderstood’ the ADR agreement. Following a period of further correspondence, HMRC issued an assessment to TST in relation to its treatment of supporter schemes from 1 April 2013, stating that VAT should be charged on all payments received from members of the Supporter Schemes and not just the amount deemed to cover the value of the benefits. TST therefore appealed again to the FTT again on the basis that it had a written agreement with HMRC. The main questions to be decided by the FTT were:

  • whether the FTT had jurisdiction to rule on the issue;
  • whether TST or HMRC had correctly interpreted the Supporter schemes paragraph in the ADR meeting note;
  • whether HMRC and TST had a contract and, if so, whether there was legal agreement between the parties, or an omission of a central term so as to void the contract;
  • if there had been a contract, whether HMRC had made a unilateral mistake; and
  • if there was no mistake, whether HMRC had the power to make such a contract.

It was agreed that the FTT had jurisdiction to hear the appeal, and therefore had to decide the issues set out above. The FTT found that the terms of the ADR agreement for the treatment of supporter schemes from 1 April 2013 was unambiguous and therefore TST was bound to account for VAT only on the value ascribed to the benefits.  It rejected HMRC’s arguments and found that the agreement constituted a binding contract intended to create a legal relationship between the parties. There was no unilateral mistake by HMRC in consenting to the agreement and so the contract was not void.

In considering the evidence and the facts, the FTT found that:

  1. HMRC had adopted the approach in the Council Scheme ruling in relation to at least some other charities;
  2. HMRC withdrew those rulings prospectively after the first Serpentine tribunal case was published; and
  3. TST’s adviser genuinely believed that HMRC operated a practice of requiring only that the benefits provided to members of supporter schemes be quantified and communicated to those members and did not require those benefits to be made separately available for purchase. The FTT also determined that the evidence of the HMRC mediator should be set aside as being ‘unreliable’.

However, and unfortunately for TST, on the last question the FTT found that what HMRC had agreed was wrong as a matter of law. For VAT to apply only to the benefit value, it must be clear to supporters that they can purchase the benefits separately.  HMRC could not depart from applying the correct taxing provisions without direction from parliament or an extra statutory concession and the ADR agreement was therefore ultra vires.

This was a frustrating outcome for TST, especially as it was clear that HMRC had been applying the terms agreed at ADR to the Council Scheme and to other taxpayers for several years. The only remedy for TST now would be to take judicial review proceedings against HMRC, on the basis that it had a legitimate expectation that it could rely on the ADR agreement. JR proceedings are however expensive, and it is notoriously difficult to obtain a favourable ruling against the state.

The case shows that the ADR process is not a failsafe and raises the question of how much certainty a ruling from HMRC gives to taxpayers. It is concerning that the evidence of the HMRC mediator was set aside as unreliable, and therefore one of the points to take forward when considering an ADR process is the use of an independent mediator with the necessary VAT expertise.

Any organisations accounting for VAT on a similar basis to the TST ADR agreement, should review the position and take action accordingly.

Socrates Socratous of SOC VAT Consultants gave evidence on behalf of TST.

Brexit: Preparing if the UK leaves the EU with no deal

The government has published the first 25 of a series of technical papers on how the UK will be affected by Brexit if on 29 March 2019 no deal with the EU has been reached. The “no deal” scenario is possible if the UK government and the EU cannot agree terms and the UK therefore becomes a third country at 11pm GMT on 29 March 2019 without a Withdrawal Agreement or a framework for a future relationship in place between the UK and the EU.

A no-deal Brexit could mean lorry queues building up at ports as the previously smooth import and export of goods in the Single Market ends, to be replaced by new customs checks. Goods which are meant to arrive ‘just in time’  or are perishable, could be subject to delay, affecting stocks, production and ultimately sales.

Below is a summary of the main VAT issues. More detail on trade, import and export procedures can be found here.

VAT before 29 March 2019

Under current VAT rules:

  • VAT is charged on most goods and services sold within the UK and the EU.
  • VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU or non-EU country.
  • goods that are exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale.
  • goods that are exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds.
  • for services the ‘place of supply’ rules determine the country in which you need to charge and account for VAT.

VAT after 29 March 2019 if there’s no deal

The UK will continue to have a VAT system after it leaves the EU. The VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now.

If the UK leaves the EU on 29 March 2019 without a deal, the government’s stated aim will be to keep VAT procedures as close as possible to what they are now.  However, if the UK leaves the EU with no agreement, then there will be some specific changes to the VAT rules and procedures that apply to transactions between the UK and EU member states.

UK businesses importing goods from the EU

In a no deal scenario the current rules for imports from non-EU countries will also apply to imports from the EU. Customs declarations would be needed when goods enter the UK (an import declaration). This means customs duty may also become due on imports from the EU customs checks may be carried out and any customs duties must be paid –  import VAT would be payable on such goods.

If the UK leaves the EU without an agreement, the government will introduce ‘postponed accounting’ for import VAT on goods brought into the UK. This means that UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border. This will apply both to imports from the EU and also non-EU countries. More detail on these processes can be found in the ‘Trading with the EU if there’s no Brexit deal’ technical notice. More guidance setting out further detail on accounting and record keeping requirements will be issued in due course.

Goods entering the UK as parcels sent by overseas businesses

VAT will become due on goods sent as parcels from overseas busniesses. If the UK leaves the EU without an agreement then Low Value Consignment Relief (LVCR) will no longer apply to any parcels arriving in the UK.  For parcels valued up to and including £135, the Government states that a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due.

For goods worth more than £135 sent as parcels VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-EU countries.

Exporting goods to the EU

UK businesses would need to plan for customs and VAT processes, which will be checked at the EU border. So they should check with the EU or relevant Member State the rules and processes which need to apply to their goods.

Exporting goods to EU businesses –VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses, but will not be required to complete EC sales lists. UK businesses exporting goods to EU businesses will need to retain evidence to prove that goods have left the UK, to support the zero-rating of the supply.  The required evidence will be similar to that currently required for exports to non-EU countries with any differences to be communicated in due course.

Import VAT at the rate due on the Member State and customs duties will be due when the goods arrive into the EU. UK businesses nwoudl need to check the relevant import VAT rules in the EU Member State concerned.

Exporting goods to EU consumers -if the UK leaves the EU without an agreement, the VAT distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers.

Current EU rules would mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties becoming due when the goods arrive into the EU.

Supplying services into the EU from the UK

If the UK leaves the EU without an agreement, the main VAT ‘place of supply’ rules (which determine the country in which you need to charge and account for VAT) will continue to apply in broadly the same way that they do now, with areas of potential change  flagged below.

Digital services to non-business customers – the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the EU Member State within which your customer is a resident.

Insurance and financial services – if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed. 

Tour Operators -businesses that buy and sell on certain travel services that take place in the EU use the Tour Operators Margin Scheme. HMRC state that they will continue to work with businesses to minimise any impact.

VAT Mini One Stop Shop (MOSS)

MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.

If the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU.

Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019.

Alternatively, a business can register for VAT locally in each EU Member State where sales are made.

EU VAT refund system

If the UK leaves the EU without an agreement, then UK businesses will continue to be able to claim refunds of VAT from EU member states but in future they will need to use the existing processes for non-EU businesses.

EU VAT Registration Number Validation – accessed via the EU Commission’s website

If the UK leaves the EU without an agreement, UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers.  UK VAT registration numbers will no longer be part of this service.  HMRC is developing a service so that UK VAT numbers can continue to be validated.

Businesses in Northern Ireland importing and exporting to Ireland

There is no detail on trade between Northern Irleand and Ireland except that the paper states that in a no deal scenario, the UK would ‘stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland’.

More information from HMRC on Making Tax Digital

On 13 July 2018 HMRC published further information on Making Tax Digital (MTD) for businesses and agents in the run up to the start of the mandatory MTD VAT service from 1 April 2019.

From April 2019 all VAT registered businesses (including charities) with a taxable turnover above the VAT threshold (£85,000) are required to keep their VAT business records digitally and send their VAT returns using Making Tax Digital (MTD) compatible software. Businesses with a taxable turnover below the VAT threshold will not have to operate MTD, but can still choose to do so voluntarily.  A reminder of key principles behind MTD for VAT can be found in our previous article here.

The information includes:

  • A new HMRC VAT Notice. The VAT Notice 700/22  gives guidance on the digital record keeping and return requirements of MTD for VAT including:
    • Who needs to follow the MTD rules and from when;
    • The digital records businesses must keep, and a series of HMRC directions that relax these requirements in certain circumstances (such as where a mixed rate supply is made, where a third party agent makes or receives supplies on behalf of a business, and where a business uses a special VAT scheme such as a retail scheme or the Flat Rate Scheme);
    • How businesses must use software to keep digital records and file their returns from those digital records, including information on when programs do and do not need to be digitally linked in situations where a combination of software programs is used.
    • A number of illustrated examples to show customers how to ensure their specific set-up will be compliant with the regulations from April 2019
  • A page on GOV.UK providing a list of software developers  HMRC is currently working with that have already demonstrated a prototype of their product ready to start testing with businesses and/or agents. Over 35 of these have said they’ll have software ready during the first phase of the VAT pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.
  • A communications pack to provide stakeholders with information to support businesses and agents to prepare for MTD.

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HMRC consult on new way for building traders to account for VAT

Under rules to come in on 1 October 2019 builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.

The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.

Following an initial consultation in March 2017, HMRC has now published draft legislation, a draft explanatory memorandum and a draft tax information and impact note on the so-called “Reverse Charge (RC) for construction services”. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.

Under the new rules, supplies of standard or reduced rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.

The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.

Type of work affected

Despite the rather misleading reference to ’construction‘ the RC will in fact apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.

Excluded works

Some works will not be covered and invoicing for these will not change. These include

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Questions and preparation

In addition to the technical consultation HMRC has been engaging with trade bodies, and discussions are ongoing.

One of the main concerns is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ’white goods‘ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.

The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. But this is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cashflow projections will also need to adjust.

Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.

The Wakefield College case and ‘non-business’ for VAT

The Court of appeal has released its judgment in the case of Wakefield College v HMRC [2018] EWCA Civ 952.

This case has implications for all charities because it is about the VAT relief (a zero rate) applicable to the construction of new buildings for charities. The relief applies where a building is used for non-business purposes – “relevant charitable purpose”. Where any business use would be exempt, (for example education provided by charities), the charity will prefer its activities to be regarded as non-business so that it is not charged VAT which it cannot claim.

The Court of Appeal decision in Longridge on the Thames [2016] EWCA Civ 930, in September 2016 appeared to establish that there is limited scope for ‘non-business’ charitable activity for the purposes of the ‘relevant charitable purpose’ test.  Longbridge claimed the key test was whether the charity’s ‘predominant concern’ was the making of supplies for a consideration. It argued that its policy of subsidised pricing and use of volunteers showed that it was predominantly concerned with providing access to sporting activity and not with ‘making supplies for a consideration’. But Longridge lost in the Court of Appeal – the court thought that neither predominant concern nor the quantum of the charges were relevant. At that time, however, the Wakefield case was still running.

In Wakefield HMRC denied VAT relief for the new college building on the basis that more than 5% of the use would be ‘business’.  The issue was whether the provision of further education courses to students living locally who paid a fixed, but publicly subsidised fee, amounted to the carrying on of a business activity.

The College argued the subsidised courses were not “business” based on the CJEU decision of Finland, in which it was decided that means-tested payments, made by a minority of service users for legal advice, was not consideration because it relied on determining the means of the payer not the value of the service, and that was not a clear enough ‘link’ for the payment to be made ‘for’ the services.  This line of argument was later followed in the CJEU in Gemeente Borsele, where a municipal body charged parents for school transport, but only those travelling over a certain distance, and only to the extent families could pay, meaning it received only 3% of the actual cost of the service. The College argued that it, too, only charged a small percentage, and had kept fees low because of the economic circumstances of the local residents. It thus argued that despite charges being fixed for all qualifying applicants, this was a form of means testing, as in Finland and Gemeente Borsele, and it was therefore not receiving ‘consideration’ for these courses and thus not in ‘business’ to that extent.

Decision

The Court of Appeal found that the College was carrying on an economic activity and thus zero rating could not apply. Briefly this was because its activities were not comparable to those in Finland and Bosele. Its sole activity is the provision of educational courses, whereas the transport in Borsele and the legal services in Finland were very much ancillary to their principal activities as public bodies. The provision of courses to students paying subsidised fees was a significant, albeit minority, part of the College’s total operations and the fees paid by such students were significant in amount, both in value and in relation to the cost of providing the relevant courses. Furthermore, the fees paid by the students were calculated by reference to the cost of providing the courses, and not to the means of the individual students.

Why it matters

HMRC suggested that about 50 other cases, involving approximately £120m of VAT, would be affected by this decision. The Court made some interesting comments, derived from reading the French version of the Finland and Borsele cases, and said whether there is a supply for consideration and whether that supply constitutes an economic activity are two separate questions. A supply ‘for consideration’ is  necessary, but is not sufficient in itself for an actvity to be an ‘economic activity’. The first condition requires  the payment to be made under a legal relationship with reciprocal performance between the supplier and the recipient, i.e. the ‘direct link’. The economic activity condition means also showing that the supply is made ‘for the purpose of ‘obtaining an income. But ultimately the Court decided that here the “direct link” test was met anyway, because the fees were not means-tested.

Thus it seems likely that the position after Longridge remains, i.e. that the only use that is not to be regarded as ‘business’ is in cases where there is no ‘remuneration’ (for which read payment or ‘consideration’). Unfortunately HMRC may now be likely to argue that, even in very small operations where below-cost payment is received, (such as in the cases of St Pauls and Yarborough nurseries) construction services may not qualify for relief.

 

 

Making Tax Digital for VAT – under a year away

We are less than a year (or only 4 VAT returns to go) before the ‘Making Tax Digital’ deadline of 1 April 2019.

The first stage of Making Tax Digital (MTD) will apply to all VAT registered businesses who are over the VAT turnover threshold (£85,000 until March 2020) from the first VAT return which starts after 1 April 2019. The regulations passed into law in March 2018. HMRC have published an Explanatory Note, a draft VAT Notice and a draft Addendum document outlining ‘user journeys’, which uses diagrams to explain the digital links required between records. These can be accessed here but are subject to future amendment. A detailed chart which compares the current rules with those expected under MTD for VAT can be found on the CIOT website here and we reccommend reading this.

The regulations provide that VAT registered businesses (including charities) must keep an electronic account of information specified in the amended regulations, and must use an approved form of software to prepare and render VAT returns. Under MTD, businesses must keep certain mandatory records in a digital format within ‘functional compatible software’, able to interface with HMRC’s systems, and thus send and receive information to and from HMRC. Taxpayers using multiple accounting software packages to record or calculate information that drives VAT return data must digitally link them to be MTD compliant.

Most of our clients use software to keep their accounting records. However, we are aware that very few of them actually use that software to calculate and declare VAT returns, due to the complexities of partial exemption and business/non-business adjustments. If you are using spreadsheets for that you need to start thinking about how any adjustments calculated via spreadsheet are going to get back into a digital format for submission to HMRC under MTD. At the very least we recommend contacting your software supplier to check whether they will be providing any support, and looking at the ‘user journey’ Addendum document from HMRC. You may need to upgrade to use ‘cloud’ based accounting software.

The main and important issue is that information transfer between internal interfaces and with HMRC must be ‘digital’ (and via third party software) where the records are part of the Making Tax Digital for Business (MTDfB) journey, but adjustments (such as partial exemption) will still apparently be able to be calculated separately and manually via spreadsheet– i.e. this step is not part of the ‘MTDfB journey’. It is noted that the information to be recorded also includes a requirement to separately identify the value of income into standard rated, reduced rated, zero-rated, exempt or outside the scope outputs. HMRC plans a “soft landing” in the first year to allow organisations to transition to the new rules.

The draft regulations provide for exemptions from the digital requirements based on turnover, inability to use electronic systems for religious or practical reasons, and for businesses subject to insolvency. Exempted businesses may opt for the obligations in the regulations to apply to them if they so wish. The amended regulations also provide rules for how business records should be preserved.

Pilot scheme

Businesses can sign up to take part in a MTD pilot exercise from 1 April 2018. The benefit of taking part in the pilot will be being ahead of the game, getting access to support, being kept up to date on how the system is developing, an opportunity to influence the look and feel of the final version, and feedback on how you are getting on with the submissions. There is more information on the pilot here, but please contact us if you need more help.