Deeks VAT News
Keeping you up to date on VAT changes
Issue 1 25 June 2019
Welcome to the first issue of Deeks VAT News. We will be publishing our VAT newsletter on a weekly basis.
In this week’s issue we look at the following areas:
- Primary Care Networks and Federations
- Construction Industry Reverse Charge
- Who is entitled to reclaim VAT incurred on fuel
- Bad Debt Relief
Primary Care Networks and Federations
We anticipate that most ‘supplies’ to support the delivery of the Primary Care Network Contract DES (e.g. between members of a network or to a network from another organisation) will be of healthcare services. These supplies will generally be VAT exempt, meaning no VAT needs to be charged to anyone for these supplies.
The position will be more complicated and VAT is likely to be chargeable when, for example (this is not an exhaustive list):
1) a member of staff is provided by one organisation to another, as opposed to providing the services of a member of staff; and,
2) the services being provided are not considered to qualify as health services.
If an organisation is not VAT-registered, because (broadly) their total VAT-able supplies do not exceed £85,000 in the prior twelve months (the current threshold), then they do not need to charge VAT.
If a network nominates a practice or GP federation holding a primary care contract to receive Network Contract DES payments, and other network practices employ staff which are reimbursed by the Network Contract DES, provided the network agreement is clear that the nominated fund-holder receives and holds fees from the commissioner ‘on trust’ as a disclosed agent (ring-fenced on receipt) for those employers, the payment of those fees by the fund-holder to the employing practices should not be subject to VAT.
The general principles of VAT apply to supplies of health services and staff. Network members should consider whether VAT may apply in determining their local arrangements to deliver the Network Contract DES.
Are you ready for the new Construction Industry Reverse Charge?
HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result, a reverse charge for building work is due to be introduced, to combat fraud. This will mean, essentially, that building contractors will not pay VAT to their sub-contractors but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced on 1 October 2019.
How will the new reverse charge work in practice?
The reverse charge will apply to VAT-registered building contractors engaging VAT-registered sub-contractors and, similarly, to sub-contractors engaging others through the supply chain. A final customer for building work, such as an occupier or a developer, will not have to apply the reverse charge and will continue to incur VAT in the same way as now.
The reverse charge is aligned with the Construction Industry Scheme (CIS), and will only apply to supplies that are within the scope of the CIS but with some notable differences.
- Not all supplies within the CIS will be subject to the reverse charge. There will be various exclusions which will be particularly relevant to ‘deemed contractors.
- The reverse charge will not apply to zero-rated supplies.
- The reverse charge will extend to building materials included within a supply of building work.
- Deductions under the CIS do not affect the amount of VAT.
Contractors and sub-contractors include anyone who is acting in that capacity by making a supply of building work, whether or not this is their normal activity. HMRC have confirmed that staff agencies acting as such are not seen as supplying building work so that their services are outside the scope of the reverse charge.
If a supplier charges VAT, the customer needs to be satisfied that it is actually due. If VAT is charged incorrectly it will not be recoverable as input tax. This is particularly important because when HMRC disallows a VAT refund claim, the customer will need to seek recovery of overcharged VAT from the supplier which may be straightforward but can be difficult or impossible, for example, if the supplier is no longer trading. In this context it is important to note that, despite CJEU judgments to the effect that customers who cannot obtain rebates from suppliers should have available a mechanism to obtain a refund from HMRC, HMRC has, at time of writing, refused to accommodate this and whilst accepting claims may be possible it has adopted a policy of requiring businesses to make claims via the High Court, an expensive and uncertain approach. In essence, HMRC is only too pleased to accept windfalls, collecting VAT from suppliers that have charged it incorrectly whilst refusing to offer any practical solution to reclaiming that VAT other than via the supplier.
There are various situations, set out in the relevant legislation, where the reverse charge will not apply, otherwise, the presumption is that the reverse charge does apply. In particular, there will be no de minimis threshold.
The supplier should not charge VAT unless:
- The payment is outside the scope of the CIS;
- The customer is not (and is not required to be) VAT-registered; or
- The customer is treated as or like an ‘end user’ or is not acting in a business capacity.
Additionally, the supplier should not charge VAT if the supply is zero-rated, or if it is not VAT registered or required to be registered.
Accounting for the reverse charge
If the reverse charge does apply, its actual application may be relatively straightforward, at least once accounting systems have been adapted to deal with it.
The customer needs to declare as output tax whatever VAT the supplier would have charged, without the reverse charge, and to do so in the period when the tax point arises.
If a supplier charges VAT, the customer needs to be satisfied that it is actually due: if not, it will not be recoverable as input tax. Otherwise, the customer can treat the same amount of VAT as input tax, in the same period. It will normally be directly attributable to an onward supply of building work, and recoverable in full. If so, the reverse charge has no net effect.
Impact of the reverse charge
The reverse charge may have some significant commercial implications, particularly for small sub-contractors. There will be an impact on cash flow where businesses have used VAT collected to finance their business. Additionally, if a business is in a repayment position as a consequence of no longer having to pay VAT to HMRC they will have to wait for the refund to be processed by HMRC rather than offsetting input VAT against output VAT on a VAT return.
Care may be needed over the period when the reverse charge is introduced. There will be no transitional rules for ongoing projects, so that the charge will apply wherever the tax point is for a supply on or after 1 October 2019.
Contracts for building work will need to accommodate the new regime and in cases of uncertainty professional advice should be sought.
Who is entitled to reclaim VAT incurred on fuel – CJEU decision is Vega International Car Transport and Logistic Trading GmbH (‘Vega’)
The CJEU recently gave its judgement in the Vega case, which concerns the supply of fuel and whether Vega, as the parent company of a larger group of subsidiaries, was entitled to a refund of VAT it had incurred on the purchase of fuel in Poland.
Vega provides transport for commercial vehicles, buses, trailers and cars throughout the world from the factory directly to the customer. Fuel cards are provided to its subsidiaries which entitle the subsidiary to fuel the vehicles it is transporting. The garage supplying the fuel sends an invoice to Vega which it settles and then recharges to each subsidiary with an uplift of 2% on the cost of the fuel. Each subsidiary must then settle the account with Vega(including the 2% uplift) within a certain period of time. Vega sought to reclaim this VAT, but the Polish tax authority rejected it and the case was eventually referred to the CJEU.
The CJEU concluded that Vega could not recover this VAT because, on the facts of the case, Vega was not the entity actually acquiring the fuel and so could not have re-supplied the fuel to its subsidiaries. Interestingly, although there was no supply of goods (i.e. the fuel), the CJEU did find that Vega had provided a service to its subsidiaries in the form of a short-term credit facility, which is exempt from VAT so no entitlement to associated input tax recovery.
Whilst this case considers the supply of fuel under a fuel card scheme, it’s not difficult to see that it has wider application, so please contact us for further information or to discuss how the facts of this case may have an impact on your business
Total Catering Equipment Ltd  – Bad Debt Relief
This case involved whether a Bad Debt Relief claim could be made where a fraudulent employee was diverting credit card payments for takeaway food to his own bank account. HMRC tried to argue that the employee was agenting as an agent for his employer.
The court considered whether the employee was acting within the scope of his employment or had he gone on a frolic of his own. The Tribunal held that Bad Debt Relief was available has the business had never received payment for the goods sold and the employee was not acting as an agent for the business but had gone on a frolic of his own.
Please note that Deeks VAT News is not intended to be a comprehensive guide to every development in VAT. It should not be used as a substitute for specific advice in individual circumstances. Deeks VAT Consultancy Limited cannot accept any liability for any action/inaction as a result of any reliance on Deeks VAT News’s contents.
Deeks VAT Consultancy Limited
Managing Director: Jane Deeks LLB (Hons) LPC CTA