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Input Tax Charged in Error by Sub-Cons - New Build

Subcontractor Invoice for New Build works charged at Standard Rate, Reclaimed by Contractor.

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Hi All,

I have a client that is a Construction Company developing New Residential Dwellings for both themselves (to sell) and for clients. The supplies from our client in the course of construction are obviously Zero Rated aside from a few items which are standard rated such as freestanding appliances etc.

My client uses Sub-Contractors, most of whom Zero Rate Invoices for their work. There are however a few suppliers that have charged VAT at Standard Rate on supplies which they should have Zero Rates, and my client has subsequently reclaimed the Input Tax on their VAT return.

They have had a VAT inspection, and the officer has raised an Assessment for all of the Input Tax recovered from those sub-contractors VAT Invoices charged at Standard Rate.

Although the impact to HMRC's purse is Zero, HMRC are insisting on assessing for the Input Tax, and advising the Contractor to get in touch with all the subcontractors who have incorrectly charged VAT and recover the monies from them, who in tern will just adjust the Output tax on their next return. It all seems a lot of paperwork and stress all around for zero purpose to me.

Has anybody experienced the same or can offer any wisdom in how best to proceed? 708 or the VAT Internal Manual is clear that the Subcontractors should not be charging VAT, but i cannot find reference to the Contractor not being able to recover any VAT charged by a Subcontractor in error. Likewise any VAT registered business being liable for their suppliers charging the correct VAT amount when a VAT invoice has been provided. TIA.

Replies (3)

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By Les Howard
24th May 2019 08:14

The sub-contractors should credit the VAT incorrectly charged.
Any right of the main Contractor to sue sub-contractors for the VAT incorrectly charged is a civil matter; so it is not covered in HMRC guidance.
The main Contractor is not entitled to recover any VAT wrongly charged. HMRC should have explained this clearly in their correspondence!

I am actually writing to HMRC today on precisely this matter. But I have the advantage that they know nothing about it yet!

Thanks (1)
By djbrown
24th May 2019 11:54

I read something a month or two back, I think, on JVCC minutes, or maybe LPLG minutes, to the effect that HMRC would not be enforcing this pointless exercise. It seems that the news hasn't reached as far as the VAT man who believes it is his own money. (a common complaint) I'll try and find it and post back later.

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By djbrown
24th May 2019 13:33

from Land and Property Liaison Group meeting of 19 September 2018:

"Members noted, that although not technically correct, sub-contractors working on zero or reduced-rate projects often charged VAT at a standard rate to contractors or developers. However, HMRC compliance officers have taken a pragmatic approach on the basis that the tax effect was revenue neutral. It was felt by members that such an approach should be consistently applied. Asking businesses to correct the VAT treatment on historic supplies in such circumstances is time and cost-intensive and merely leads to a ‘money-go round’ between the parties. This often raises no additional tax, but businesses can suffer real cash flow difficulties if any delays in recovering money from any party involved arises. HMRC noted that individual compliance officers have a certain amount of authority in how to deal with certain situations involving VAT in construction supply chains and this was out of the policy team’s control. It was also suggested by BPF that this issue may cease once the new domestic reverse charge on building services comes into effect."

In other words, it's only a few months till the reverse charge change comes in, so we won't bother doing anything about it.

My memory isn't that good, obviously, but it might be worth quoting this in an argument with the VAT man, who appears blind to the 'neutral' argument. It is so blindingly obvious to everyone that it is a waste of time, I just can't contemplate what goes on in their little minds that they want to pursue something like this. I've had two clients thus far, both of whom have had a devil of a job, going back to sub-contractors to rectify it.

Rant over.

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