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This proposal has a number of advantages. First, it reduces the risk of errors resulting in penalties because the wrong rate of VAT has been applied. Secondly, once the contractors get used to the system, they will if dealing primarily with larger contractors, no longer have to find a large amount of VAT to pay each quarter. Finally, in the event of another Carillion, the amount of VAT lost by HMRC (and their subcontractors) as a result of that failure will be significantly reduced.
At first reading this means that: -
Suppliers (e.g. decorators merchants) will have to know which customers are VAT registered and which are not. This means asking EVERY customer the question (how do they know who is a builder and who isn;t) and those that say that they are will have to provide documentary proof which will have to be recorded and retained.
The sub contractor will have to know if the main contractor is VAT registered (probable but not guaranteed). Again recording and retention.
The main contractor will have to determine whether his customer is a VAT registered person (e.g. Marks and Spencer, corner shop etc). If the customer is VAT registered then no VAT. If the customer is not VAT registered then VAT will be added.
This will mean additional work and record keeping at all levels without any reduction in work required for VAT accounting (under MTD) and probably making it more complex (new VAT box for construction services?)
How big is this tax gap anyway and does it justify this change? Are there any other ways of stopping this.
Construction industry already overburdened with CIS. This just adds to cost .
Have I got it right or have I misunderstood.
Very well explained as the technical writer's explanation was completely bizarre.
Anyway, I think after reading the details there will be more record keeping and actually no significant or material improvement. I don't think it's a way to kerb lost vat, just another way for HMRC to tighten their grip on the processes.
Thanks for the breakdown.
It's not bizarre at all. She correctly states that identifying end users will be key as follows:
"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 .."
Suppliers (e.g. decorators merchants) will have to know which customers are VAT registered and which are not. This means asking EVERY customer the question (how do they know who is a builder and who isn;t) and those that say that they are will have to provide documentary proof which will have to be recorded and retained.
(snip)
Have I got it right or have I misunderstood.
This bit I reckon you've misunderstood. I suspect that the supply of materials, especially by general retailers but probably also for builders' merchants, will continue to operate in the normal way.
I agree - it seems to explicitly refer to services, not goods, which is at least logical!
The supply of materials, especially by general retailers but probably also for builders' merchants, will continue to operate in the normal way.
If Trethi's summation is correct this appears to be along the lines of cross border trading with in the EU. Which I anticipate will eventually mean that b2b will charge vat at 0%, it will elevate b2b cashflow problems.
As to checking that someone is VAT registered I suspect that if this works it could be extended to income tax/corp tax to reduce the tax lost gap.
The article is as clear as mud! I hope the draft explanatory memorandum will be clearer - but I'm not betting on it!
It sounds like yet another example of HMRC making business do their job for them.
So the nett effect is a zero rated/exempt supply? Benefits the main contractor's cash flow but how does the subcontractor account for the transaction on their VAT return? For me it's a standard rated supply but they never receive the VAT. What happens in a case like Carillion - will the VAT man come after the subcontractor for the missing VAT?
I can understand HMRC being upset about all the missing VAT but it looks like this solution will create breaches of VAT regulations all across the sector. Looks like a busy time for VAT tribunals....
It seems to me to be a good idea, if I understand it correctly. The gist is that the subcontractor will provide services to the main contractor that are zero-rated. Then the main contractor cannot claim loads of VAT back and the subcontractor does not have a huge VAT bill to pay before they get paid. So the likes of Carillion are no longer able to get a VAT refund and then go out of business before having paid the subcontractor who, in turn, is not forced out of business by the need to pay VAT they havn't received. Does that make sense? Let me know if I have got the wrong end of the stick.
I seem to have missed the abolition of the Office of Tax Simplification. When did that happen?
Anyone who thinks that explaining reverse charge VAT to a building sector sub-contractor is going to be easy clearly has never met any of the ones which I have.
Larger companies and councils already ask for subbies VAT certificate so not too much new there.
I think it's a great idea that all VAT registered business don't charge each other VAT. Why should they cos VAT isn't a tax on business. The real crux is verifying the vat number belongs to the business you are dealing with.
What puzzles me is "HMRC have identified this area as a risk" not a "loss to public funds". It's risky crossing the road.
more fun
they don't even comply with CIS yet
how about HMRC do their job properly in the first place.
What are the people who think of this stuff drinking?
I would enjoy some of the same.
Back in my youth I think the phrase was "More legislation, more fornication".
If HMRC continue to work from the starting point that every small or even medium sized business person is a crook, eventually they will be crooks. This because the financial and time cost of obeying the law will sink below the value of evading the law. See, Greece, India, Italy, Russia and others.
It really is time someone with more time on their hands than I, did a marginal cost exercise on this type of obfuscatory regulation.
I don't object to the principle of a reverse charge. In fact, if Brexit ever happens, I think we should go the whole hog and abolish B2B VAT (for VAT registered traders) completely. And that's abolish as in the whole transaction doesn't go near a VAT return, not this halfway house reverse charge thing where there's micky mouse output tax to account for less micky mouse input tax equals, errr, exactly the same as no VAT at all.
But what I do object to is the imposition of yet another niche VAT treatment, and that in an industry which already has too many of them and where, let's be honest, the average trader has zero chance of 100% compliance (I've even had one recently where the trader managed to get something relatively simple like zero rating on new build wrong). This just feels like the usual HMRC tactic these days of setting things up so fails (and consequential penalties) are guaranteed.
If HMRC are really concerned about missing trader fraud and are really convinced about the power of technology as they like to bang on about, why not have a system where the customer is only required to pay the VAT part of a bill when the supplier can show that the output tax has been paid over to HMRC? Granted, that solution probably isn't that feasible but at least it's an attempt to address the problem without punishing the innocent parties (although that's probably a concept the big brother department at HMRC are not very familiar with).
to continue; "They" miss the point. Is anyone reading this old enough to remember Purchase Tax?
Setting aside HMRC's ability to complicate boiling an egg:
The real advantage of VAT is that it is a balancing act. Both sides have an interest in correct paperwork. So, to maximum extent they balance each other out.
If you revert to a tax system close to or similar to a sales tax, or Purchase Tax.
You remove the need for either the seller or the buyer, one of them, to require and record the transaction.
A sure route to ancient pre-1972 forms of fiddling.
alternatively, as seems possible from the garbled explanation, we might see contractors dock subcontractors 40% of their Gross income. 20% VAT 20% CIS. This will do wonders for the construction industry, and the prices charged to customers.
Just keep in mind Canary Wharf started with my two-man company client putting up scaffolding.
This:
Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient.
I can see endless Tribunal cases on this point, as it's a clear case of unjust enrichment for HMRC. Not to mention a 20% hole in the finances....
Does make the vat software solution choice for small sub contractors post next April that much more interesting.
Will they require to enter both the output and input vat and outputs and inputs within their records to make accurate vat returns (and i presume for Gov stats) or are sub contractors (who do no other work for end users who are not contractors) to become mere vat repayment entities re their material etc purchases?
As has already been pointed out, why don't we simply do away with the VAT "chain" of inputs? When I joined Customs I was told that what made VAT difficult to avoid was "the chain", now they're saying it's the problem!
Dear All,
This crazy attempt at shifting the buck will not solve the issue of "missing VAT". Granted.. . in the case of Carillion, this would have avoided the loss of tax receipts but, is that really where the problem lies.
The way I see it, no reputable contractor would look to avoid paying VAT to subcontractors. Why would they? They claim it back and, in the case of new build, the output would be zero rated. Furthermore, the suggestion would be that the contractor is subcontracting for "cash" which would inevitably mean a much larger taxable profit.
Likewise, I can't see a subcontractor avoiding charging VAT to a registered contractor the NET value (and hence the true cost to the contractor) is the same with or without VAT.
However, I am not averse to seeing changes made in construction. The problem is that, missing VAT is more likely to occur in the final transaction (i.e. the ultimate client). How many large contractors seek to work "for cash"? I doubt there are many. However, how many smaller builders work "for cash"... either to undercut a reputable builder or... to avoid VAT registration altogether? I would suggest there are numerous examples!
Unfortunately, until the calls of the FMB, NHBC etc. are heard and consideration given to the suggestion of a reduced rate of VAT for extensions and refurbishments, the chasm between using a VAT registered builder and a non-registered one (or someone who is willing to ignore the law), is simply too attraction to the end client and/ or the disreputable builder.
Finally, and incidentally, having worked for a short while in Spain, I've experienced their attempt at RC. In all honesty, there is so much confusion about "who pays the VAT" that it gets to the stage where hardly anyone pays it! How in earth do HMRC police that?
The real solution to VAT complexity is to remove it, and charge 20% VAT on everything except absolute essentials.
Why are many financial services exempt?
This new scheme is just adding further uncertainty and complexity at the same time as MTD comes in- I can just imagine the 'fun' VAT registered subbies will have with all this.
If the HMRC are so worried about losing out on VAT, why do they not chase AMAZON for the VAT their sellers are not paying??
Conservatively estimated at around £1 billion.
Amazon is long on talk, but short on action, in sorting this issue!
VAT is a stupid tax and is open to massive fraud opportunities. With actual VAT monies transferring perhaps many times from inception of a product/service through to reaching the final consumer, the only people who benefit from the system are the banks and crooks.
It is bizarre that we can sell goods outside of the UK and not charge VAT yet goods and services between UK businesses have to involve the completely unnecessary transfer of VAT monies as well.
Call it what you like, reverse charge or inter-business nil charge, but VAT would be massively easier to administer if only the last person in the chain charged VAT to the consumer. With just businesses that sell to final consumers to monitor, HMRC could virtually eliminate fraud almost overnight.
The problem is that this is too simple for those (once again) with vested interests, so it is unlikely to happen, although reverse charges for the building industry seems like a step in that direction.