Ever since the introduction of VAT in 1973, when it replaced purchase tax, business have effectively been unpaid tax collectors. Increasingly, they are also being asked by HM Revenue and Customs (HMRC) to act as unpaid VAT inspectors too. It is generally accepted it is the supplier's responsibility to get the VAT liability right.
On many occasions, where there is doubt about whether VAT applies, people will err on the side of caution by charging tax on the goods or services supplied. The supplier's thinking in these cases is that they will not be penalised if they over-declare VAT. And the customer will be able to recover it anyway, right? Wrong.
In the oil and gas sector, we are now regularly seeing HMRC challenging input tax claims where VAT should not have been charged in the first instance. HMRC is rejecting these claims on the basis that the correct route to recover this 'VAT' is direct from the supplier. This position was reaffirmed recently in HMRC's Revenue and Customs Brief 4/2017 notice, following a Supreme Court decision on the case of Investment Trust Companies (ITC) (in liquidation) v HMRC.
For many north-east taxpayers, the issue is more than an administrative inconvenience in securing the refund. In the current climate, a supplier you dealt with in 2014 may no longer be in existence, making recovery of the overcharged VAT impossible.
HMRC is also transferring the responsibility for checking the VAT treatment onto the customer. It has argued on several occasions that customers should have been aware that VAT was charged incorrectly, and that over-claims result from taxpayers failing to take reasonable care. Where HMRC considers an error has been made as a result of carelessness by the taxpayer, a penalty of up to 30% of the VAT over claimed can be charged.
For oil and gas businesses, complex VAT rules create a particular challenge and in order to combat this Anderson Anderson & Brown LLP has developed an interactive application.
Our This Place of Supply Tool is designed to help business make sure the correct VAT treatment is applied, while supporting existing processes and controls. It provides a clear audit trail of the decision-making process in arriving at the VAT treatment, which shows HMRC that reasonable care has been taken.
For supliers, it ensures VAT is only charged when due and for customers, it allows the early identification of overcharged VAT - meaning it can be corrected before it becomes a problem.
Not only are more oil and gas companies effectively being asked to become unpaid tax inspectors, recipients of contruction services are subject to regular challenges by HMRC in relation to overcharged VAT.
Our advice is don't err on the side of caution - make sure that VAT treatment is correct. For more information please contact Alistair Duncan (firstname.lastname@example.org) or your usual AAB contact.