Share this content
14

£0.5m VAT problem

Complicated scenario.....

Didn't find your answer?

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?

Replies (14)

Please login or register to join the discussion.

Hallerud at Easter
By DJKL
20th Jan 2017 13:26

What, if anything, does the JV sell to the end customers of the completed dwellings given it never owns the land? What is the legal process re the conveyancing?

Does the JV perhaps invoice the Landowner?

In effect who sells the dwellings?

Thanks (1)
Replying to DJKL:
avatar
By adam.arca
20th Jan 2017 13:46

Yes, sorry, never cover all the angles when drafting questions.

JV does indeed invoice L (zero rated this time) and the house sales were made by L.

Thanks (0)
RLI
By lionofludesch
20th Jan 2017 13:40

Item 3.

Not true - although HMRC might overlook a subbie's VAT on the grounds that it was small and travelling in a circle, so not worth pursuing.

Thanks (1)
Replying to lionofludesch:
avatar
By adam.arca
20th Jan 2017 13:48

Item 3 not true. Indeed, I agree but that was what the inspector said (or at least implied). Good to have my understanding confirmed.

Thanks (0)
avatar
By readingaccountant
20th Jan 2017 13:57

I haven't had experience of anything completely similar, however, I'd say that when the VAT has been recouped by C and paid by JV, the invoices between the two entities should be amended and the recouped VAT paid from C to JV.

Re: VAT implications of VAT on main contractor, I'm not sure which rate this should be, however, I'd say the main contractor would be determined by the underlying contractual agreements between the JV and C.

Thanks (1)
Replying to readingaccountant:
avatar
By adam.arca
20th Jan 2017 13:51

Yes, the JV will need to be reimbursed as it is the one which will be out of pocket if we have to go through this rigmarole. Rather hoping not to, though!

Thanks (0)
Replying to adam.arca:
avatar
By readingaccountant
20th Jan 2017 14:05

If it is agreed by both entities, it may be possible to draft up a debt forgiveness, so no cash would have to be transferred.

Thanks (0)
Hallerud at Easter
By DJKL
20th Jan 2017 13:59

I am afraid I see little mileage in your point 3, as Lion says the HMRC contact appears wrong if one relies upon 708, even if a sub contractor vat ought not to have been charged . (Should one rely on 708 is another question, you may wish to read the underlying legislation)

As a long shot a consultation with a vat consultant might be worthwhile but providing there is no question of actual overall vat loss/ cost not sure of its real worth.

Thanks (1)
Replying to DJKL:
avatar
By adam.arca
20th Jan 2017 14:10

Point 3: yes, it was a flyer and not surprised it's being shot down.

The problem for my client isn't that there's a VAT cost (because there isn't) but that the cash flow implications. If it were, say, a few £k or even low £tens of thousands, then they would probably grin and bear the time lag between paying HMRC via the JV and being reimbursed via C.

But it's not. It's £0.5m which they don't have and which no bank is realistically going to lend them. And what does this achieve for HMRC? Yes, they get their books neat and tidy with the right liabilities in the right place but they still won't be a penny better off in terms of tax-take.

Hoping that someone's got experience of HMRC taking a pragmatic view in a scenario like this.

Thanks (0)
avatar
By shaun king
20th Jan 2017 14:09

Well DMU will be out of the stalls like a thoroughbred racehorse when they see a £0.5m debt. However, if the officer has said he will effectively allow net off by delaying enforcement action, then I suggest you write to him asking him to confirm this point and then if and when chased by DMU produce a copy of the letter to them and it is likely they will back off.

Thanks (1)
Replying to shaun king:
avatar
By adam.arca
20th Jan 2017 14:18

That's a great idea, many thanks. Whether we'll get such a letter from the officer, though.....

Thanks (0)
Replying to adam.arca:
avatar
By shaun king
20th Jan 2017 14:30

You will not need it if you word your letter to him correctly in the first instance!!

Thanks (0)
avatar
By ruth.julian
20th Jan 2017 14:19

I've not had experience of sums like this. Normally with connected parties the pragmatic approach has been taken. However, it is getting near the year end and the VAT inspector may have been looking at their performance report and wanted to up their stats with assessment for amount overclaimed!

Thanks (1)
Replying to ruth.julian:
avatar
By adam.arca
20th Jan 2017 14:26

Yes, we've won on various other points and we've been pushing hard for pragmatism on this point but the inspector isn't for moving on the wrongly charged VAT. It does make you cynical, doesn't it?

Thanks (0)
Share this content