To charge or not to charge? The VAT conundrum

HMRC is looking closely at the VAT charged in certain industries, writes ALISTAIR DUNCAN of AAB in Aberdeen. And it could lead to significant VAT cost, including penalties.

For many businesses providing services, the rules around charging VAT are pretty straightforward. If you’re unsure as to whether VAT is chargeable, most companies in the past have erred on the side of caution and added the sales tax to their bill. After all, their customer will simply claim it back in the input column of their regular VAT return.

Recently, however, we’ve noticed HMRC challenging input VAT where they claim it should never have been charged. In the best case scenario, this can require obtaining a credit note from the supplier, causing unnecessary inconvenience. However, in the worst case, the supplier may no longer be in business meaning there is no scope to obtain a refund of the VAT incorrectly paid and, in certain circumstances, it can also lead to potential penalties.

The energy sector produces a number of complexities around the place of supply of service. For example, someone in Aberdeen might be working for another company based in the UK, but remotely monitoring geological activities in, say, the Caspian Sea. This means that there is room for interpretation over issues such as land-related services and place of supply.

Another market in which complications arise is the construction industry in areas such as relief for new builds. Again, we see push back from HMRC over interpretations of when VAT is chargeable and when it’s not.

Of course, it’s possible to make honest mistakes with your VAT and it may be that you’re in the kind of business where you can only make a decision about charging on a case-by-case, invoice-by-invoice basis. Some forward-thinking accountancy firms are providing straightforward tools to help you, whether you are the supplier or the recipient, make a choice which avoids falling foul of HMRC. If you’re up front about any errors, it will cost you less in penalties than if the Revenue uncovers the discrepancy themselves.