I have started acting for a general builder client ("C") who had contracted (verbally!) with a third party ("L" for land-owner) to develop new build houses on the latter's land. A JV company was stuck in the middle to manage the project including sales and deal with all contractors (mainly "C" but also others) but not to own the land (which stayed with L). C has been responsible for all accounting issues within the JV.
This has been going on for a couple of years and the JV has recently had a VAT inspection. They have been pulled up by the VAT inspector because C had charged standard-rated VAT even though it was new build and the JV had obviously reclaimed that. The inspector has said he will raise an assessment upon the JV for £0.5m VAT wrongly claimed and that C should then make a voluntary declaration in order to recoup the same VAT. So, the problem is not one of having an unexpected cost but a cash flow one of a) how to fund £0.5m which doesn't exist and b) how to do so for the several months it's likely to take for HMRC to cough up on the voluntary declaration. The VAT inspector has said he will contact Debt Management to request that they update their records so as not to chase the money owed to them by the JV until they have repaid the money owed to C but, frankly, I have no faith in DMU not chasing hard for a £0.5m debt as soon as it appears on their screen.
So, my questions are:
1. Has anyone else ever had a similar scenario with the VATman of an "in" and an "out" which net off but between two different entities?
2. The VAT inspector insists (understandably) that VAT returns have to be right both in the JV and C, so HMRC can't just net off, let the past be the past given there is no revenue loss and not bother to raise an assessment. Does anyone have an alternative experience where such netting off was achieved?
3. The VAT inspector appeared to suggest (although this isn't my reading of Notice 708) that it would be alright for a subbie to charge standard-rated VAT even on a new build but not a main contractor. He regards C as the main contractor but, actually, we would argue that the JV is the main contractor and C is a subbie to the JV and, on that basis, it would be OK for C to charge the VAT and no need for an assessment now. Anyone see any mileage in that argument?
4. Anyone got any experience with DMU attitude where one entity owes but HMRC in turn owe another entity?