Tony Cochrane: Construction sub-contractor left out of pocket after VAT case
In the recent J&B Hopkins (“J&BH”) Upper Tier Tax Tribunal VAT case, the court agreed with HMRC’s view that the business should be assessed for underpaid VAT, even though the business felt that HMRC would unfairly benefit from such an assessment.
The business has been left with a £221k VAT bill to pay, so this case should prompt other businesses in the construction sector to consider how they account for VAT on construction services.
J&BH was involved in a construction project as a sub-contractor for Rok, the main contractor. A charity engaged Rok to construct a place of worship. The charity provided a VAT certificate to Rok advising that the construction services should be zero-rated. Rok provided the certificate to J&BH, who zero-rated their supplies of construction services to Rok in 2009 and 2010.
Unbeknown to J&BH and Rok, the charity’s certificate only permitted Rok to zero-rate their supplies. The certificate was irrelevant to sub-contractors who should account for VAT at the normal rate, in this instance 20% standard rate VAT.
In 2013 HMRC undertook a VAT inspection at J&BH. HMRC concluded that J&BH’s supplies should have been standard rated because Rok was its customer, not the charity.
Unfortunately, by this point Rok had been liquidated. Had Rok been solvent and trading as normal, J&BH could have issued a VAT only invoice to Rok and would not be out of pocket paying HMRC’s VAT assessment. Due to Rok’s status J&BH would suffer the cost of paying HMRC’s circa £221k VAT assessment.
J&BH appealed HMRC’s assessment. Whilst J&BH accepted it was incorrect to zero-rate its supply of construction services to HMRC, it argued that HMRC’s VAT assessments were contrary to EU law as they would be unjustly enriched. In other words, J&BH felt that it would be unfair for HMRC to benefit from a windfall, given Rok could not reclaim the VAT from HMRC.
The Upper Tax Tribunal ruled that if there was a windfall it was at Rok’s expense, rather than J&BH. That is Rok lost out on claiming VAT. In any case J&BH should have accounted for VAT to HMRC.
Ultimately the initial error had been made by J&BH, albeit they may have been misguided by Rok providing the charity’s VAT certificate.
Further, J&BH could not invoke the principles of fiscal neutrality and effectiveness to correct the position just because it could not remedy the position directly with its customer. If Rok had still been trading J&BH would have issued a VAT only invoice, or issued credit notes and new invoices with 20% VAT.
Impact on your organisation
From October 2019 the introduction of reverse charge VAT accounting in the construction sector should mitigate this issue.
- Tony Cochrane is VAT senior manager at Johnston Carmichael
This article was originally published on the Johnston Carmichael website