A cautionary tale about tax
Peter Webb, partner at Thomas Westcott chartered accountants, discusses a particularly taxing issue.
Over the last 12 months, two of my clients involved in the construction industry have suffered joint visits by the HMRC VAT and Construction Industry Team.
With the demise of local HMRC offices, this approach represents a change from previous HMRC practice.
These visits were ostensibly to ensure that the clients had complied with VAT and CIS rules but turned out to be more in depth than was expected. It is beneficial to share some of the main points arising from the visits.
Both clients were involved in the construction of new-build homes for large national house building contractors, on a self-billing basis. As such, the supplies were quite correctly zero- rated and both companies were able to make substantial reclaims of input VAT in respect of material and other relevant costs.
However, in both cases, the client was asked to prove that the correct VAT rate had been applied. The self-billing invoice was not deemed sufficient proof and because the HMRC teams had travelled from outside the area, there was no local knowledge of the sites involved.
The clients were asked to produce plans and planning permissions which, in both cases, they were able to do and thus prove their returns.
However, this complication added time and stress to the process.
The Construction Industry Team checks took a two-pronged approach:
Were payments being made to bona-fide subcontractors, or should the recipient be treated as an employee (in which case the liability to PAYE and national insurance payable by the contractor would be that much greater)? Also, this could result in the contractor being liable for auto-enrolment pensions, holiday pay, sick pay and paternity/maternity pay.
Where the sub-contractor was properly classified as such, had the appropriate verification steps been taken, and were the correct tax deductions being taken?
In relation to the first area, much has been written in the press in recent times regarding the classification of workers, and there have been two high-profile employment tribunal cases involving Pimlico Plumbers and Uber that have found in favour of employed status.
It is therefore vitally important that, where self-employed sub-contractors are used, their employment status is reviewed on a regular basis. There is a useful tool for checking status on the HMRC website.
Once status has been determined, the sub-contractor must be confirmed with HMRC before any payment is made in order to ascertain the tax treatment, ie, whether no tax, 20% or the higher 30% rate should be used. If the wrong rate is used, it is the contractor that will be liable for any additional tax due together with penalties for non-compliance.
These steps are easy to overlook in a busy working environment but failure to adhere to the rules can lead to substantial liabilities.