Claiming VAT in the correct business

Building materials
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Neil Warren shares a case study involving two associated companies and HMRC’s disallowance of nearly £50,000 of input tax.

Bob Antsy is the sole director of a building company (Antsy Builders Ltd). It is VAT registered and been trading for many years, so has a long history of credit worthiness and good relationships with suppliers. Bob has spotted a gap in the market, to build and install wet rooms for elderly people, so he formed Bob’s Bathrooms Ltd for this activity. As Bob’s Bathrooms will be buying a lot of stock, Bob decided to VAT register the company straight away.

The trading dilemma

As Bob’s Bathrooms is a new business, it can’t get credit and good discounts from suppliers – that will take time. Bob made a commercial decision to use the supplier accounts of his other company: Antsy Builders to buy all materials. This means that purchase invoices issued by suppliers are made out to Antsy Builders Ltd, although payment for the goods was made directly by Bobs Bathrooms Ltd.

Can you guess the VAT problem that is now lurking like soap on the shower room floor?

VAT return

Bob’s Bathrooms claimed input tax on the materials and also processed the invoices through its purchase ledger. This is the correct procedure, because there is a ‘direct and immediate link’ between input tax claimed and the subsequent output tax that will be declared on the company’s jobs. It would be wrong for Antsy Builders to claim input tax because it has never owned the goods. The phrase ‘direct and immediate link’ was first voiced in the 1995 case of BLP Group Plc (STC424) and has stood the test of time (see VAT Input tax manual VIT21000).  

HMRC’s reaction

HMRC reviewed the first VAT return submitted by Bob’s Bathrooms and disallowed nearly £50,000 of input tax. The VAT officer said: “I need to disallow the input tax claimed on the return as the evidence provided indicates all the purchases included on the claim were supplies made to Antsy Builders Ltd”

Agency arrangement

If this situation had been considered before the arrangement between the two companies started, my suggestion would have been that the VAT should be dealt with by Antsy Builders effectively acting as an ‘undisclosed agent’. In other words, it claims input tax on the purchase of the goods, and then raises a sales invoice (plus VAT) to Bob’s Bathrooms. Then Bob’s Bathrooms would claim input tax on this invoice, all in the same VAT period. The raison d’etre for an agency arrangement is because Antsy Builders has never owned the goods (see VAT Notice 700, para 22.6).

The outcome

The VAT officer was satisfied that there was no duplication of input tax and that only Bob’s Bathrooms had made a claim, but he still reduced the input tax claimed by that company.

Rather than dispute the rights and wrongs of the situation, I advised my client to accept the outcome and then claim input tax on the next VAT return of Antsy Builders and then in the same period, Antsy raises the sales invoice I mentioned to Bob’s Bathrooms and the situation is resolved: that is, a nil VAT payment for Antsy Builders and an input tax claim for Bob’s Bathrooms. The next VAT return period was only a few weeks away, so there was no major cash flow delay.

Was HMRC correct?

Bob’s Bathrooms did not have a proper tax invoice to supports its claim because the documents were made out to a separate company. We quoted the 1995 VAT Regulations, (SI 1995/2518, Reg 29(2)), which gives an HMRC officer the power to accept alternative evidence in the absence of a tax invoice, to show that VAT has been paid by a business on expenditure relevant to its taxable sales.

The VAT officer dismissed this legislation on the basis that Bob’s Bathrooms did have a tax invoice, so alternative evidence was not necessary. The problem was the invoice was addressed to the wrong company. In the end, it was not important because we got the result we were seeking.

However, I am confident that if the facts were heard by a VAT tribunal, then the administrative oversight of the wrong company being shown on the purchase invoices would be superseded by the fact that the VAT ‘belonged’ to Bob’s Bathrooms.

Watch that horse

This case study has a happy ending, but my key message is that the VAT issues of any deal need to be considered before it takes place, not after the horse has bolted from its stable!

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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11th Jun 2018 10:28

Although, technically, the VAT man is right, you would think he would exercise some flexibility knowing full well what the outcome would be.

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to johnjenkins
11th Jun 2018 13:15

The VAT computer systems have not been set up for many years to permit that sort of discretion - not since there were first penalties for errors.
Neil's solution has always been the accepted one and ensures a clear and complete audit trail from the supplier to the end customer.

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to Karen Watson
11th Jun 2018 13:56

I bet with all the money spent on MTD for VAT, discretion will still not be set up.

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11th Jun 2018 14:45

The agency option was always the best option, in my view. Especially if you stagger the VAT return periods so the client gets the input tax back before paying over the output tax.....No advantage other than a cashflow one, but worth doing nonetheless.

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12th Jun 2018 00:12

No penalties imposed on Bob’s bathroom?

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to Sheepy306
12th Jun 2018 08:59

Maybe that's where the discretion comes in.

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