VAT on termination clauses and groups for builders
Construction companies face further complications in 2021 with changes in the VAT treatment of compensation payments and the grouping rules. Tania Rowe sets out the issues involved.
Contract terminations and damages
Termination clauses and liquidated damage clauses are common in the construction industry, so the change announced in Revenue & Customs Brief 12/2020 is significant and a cost to the business.
This announcement followed on from two CJEU judgments, principally based on mobile phone contract termination cases. It has changed the VAT treatment from something that is outside the scope of VAT, as it has no supply, to a taxable transaction if it can be linked in any way to a supply.
The HMRC guidance VATSC05930 states: “Although the payments are designed to compensate, they are made as a result of events envisaged under the contract. They are therefore part of the agreement and are consideration for what is provided under it.”
Also R&C Brief 12/2020 calls on businesses to take action when it demands: “Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error. Any taxable person that has had a specific ruling from HMRC saying that such fees are outside the scope of VAT should account for VAT on such fees received after the issue of this Revenue and Customs Brief.”
This means that the change is retrospective, going back four years.
The HMRC policy paper VAT Grouping - establishment, eligibility and registration calls for evidence on the method of forming a VAT group. It draws a distinction between the “establishment only” basis (most EU countries) or the “whole establishment” basis (the current UK system).
The establishment only basis restricts the VAT group to entities with establishments in the UK with a UK registration. A whole establishment basis allows all fixed establishments and branches of the eligible person to belong to a UK-registered VAT group if the eligible person is established in the UK. We are principally a UK operation, so we had no particular views on this.
However, the call for evidence also asked for views on compulsory group VAT registration, which can be more problematic for the construction industry because their services can apply at any rate of VAT, dependant on the type of build, the client, whether a certificate is issued and many other factors.
Finally, the call for evidence addressed the inclusion of partnerships in the group VAT registration by law, as opposed to the current position where their inclusion is by concession.
Construction is in many instances a collaborative exercise, and not only between statutory entities. The call for evidence addressed LLPs and Scottish Partnerships but construction projects also operate via JANEs (Joint Association No Entity), which are used in collaborations on really big projects.
Golden brick letter alert
The latest HMRC innovation has been the so-called golden brick letter.
A golden brick is the essentially the first brick to be laid above ground after a site is prepared and shows that a zero-rated building is now under construction. The letter is seeking information on the nature of those supplies, who they are to, copies of contracts and process controls around when the zero-rating will apply.
Oh well, I have nothing else to do ...
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Tania spent ten years as a Project Accountant before moving to Tax. She then spent 17 years working for Whitbread as a CT manager, principally involved in compliance and M&A work, and for the last 9 years has worked for Willmott Dixon and is responsible for all areas of tax.