One of the developments that has unsettled me over recent years is HMRC’s refusal to give rulings on specific transactions or liability issues. What if you can’t get a ruling from HMRC?
HMRC’s position on “non-statutory” rulings/clearances is here on their website http://www.hmrc.gov.uk/cap/nscg.htm.
It includes a list of situations when they won’t give rulings on specific situations, which includes the following: where “HMRC doesn’t think that there are genuine points of uncertainty – they will explain why they think this and direct you to the relevant online guidance”.
I appreciate that HMRC does not have the resources to reply to every request for a written ruling they receive, so it’s reasonable that they limit the situations when they will give a ruling to more difficult or complex situations that aren’t covered in their guidance. And to be fair, HMRC’s public guidance in the form of VAT notices and leaflets is pretty comprehensive and covers most day to day business transactions. Of course many business owners and advisors still find it challenging to find the information that they need in the notices, or to understand HMRC’s guidance, but at least the information is available.
VAT incorrectly charged
The main reason that businesses want rulings is to ensure that they charge enough VAT on their sales to avoid possible assessments and penalties in the future. However the other aspect is that customers can only recover VAT that has been correctly charged. Even if the supplier has charged 20% VAT and paid it to HMRC, if the supply was liable to the 5% rate, the zero-rate or exemption, the customer can’t claim any VAT back because the invoice issued by the supplier is incorrect. But the supplier has to pay the VAT to HMRC charged on the invoice even if it’s the wrong rate or amount.
This can be rectified by a credit note and a new invoice, as long as done within the normal 4 year period for adjusting errors. But it means that both parties – supplier and customer – take equal responsibility for ensuring that the VAT is correct, which often means that customers have to understand the VAT rules for their suppliers’ business as well as their own. For example property developers have to understand when the zero-rate or reduced 5% rate applies to contractors’ services so that they don’t pay too much VAT and have problems with recovery later on.
Can you rely on the public notices
If HMRC won’t give a ruling, they normally refer business owners to the appropriate VAT notice for information and for the most part, information in the notices is given in a clear and unambiguous way. However what about situations when even HMRC’s interpretation of law and/or practice is different to what is written in the notices?
A good example of this is the issue of composite supply. This is when a sale of goods or services is made up of a number of elements, one of which is the main element, while the others are “for the better enjoyment” of the main element. In this situation, the VAT liability of the total supply is that of the main element. A good example is printed mail packs including small gifts such as pens.
However, what if you’ve followed HMRC’s guidance for years and they eventually tell you that they don’t believe that your sales fall into the category covered by the guidance? At the moment, HMRC are understood to be challenging the VAT liability of certain composite supplies based on the meaning of the “better enjoyment” principle. There isn’t much guidance in HMRC’s guidance about the interpretation of “better enjoyment”, so if you’ve applied what you believe to be the correct liability for years on the basis of HMRC’s guidance of the composite supply principle, this is no guarantee that HMRC will agree.
What can we do as advisors?
As advisors, part of our job isn’t just to give a list of VAT liability opinions to our clients. Nowadays, more and more, it’s about educating clients about dealing with HMRC, which includes when HMRC will provide a ruling and when they have to rely on the information in the public notice. A good example is the guidance about construction services in VAT Notice 708: Buildings and construction and the situations when the 5% reduced rate applies. I think this covers most routine building work pretty well, so if a client insists on asking HMRC for a ruling about construction work that I believe is clearly dealt with in the notice, then as a consultant, I have to explain to them that HMRC will probably not give a ruling.
But sometimes it’s worth writing to HMRC with your own views based on the notice. If HMRC agree, they will probably state that they believe that the situation is dealt with in the notice, which gives you a pretty good indication that they agree with your interpretation. This isn’t perfect, but its worth doing if the amounts involved are significant or if you have a nervous client who wants to try getting a ruling.
The other thing we can do as advisors is to ensure that there is provision in the contract to agree the VAT liability of the sales concerned and that the contract includes procedures to follow if HMRC disagree with the liability at a later date. This could include whether the customer is liable to pay any additional VAT, issuing credit notes/amended invoices, whether/how to appeal, who will bear the costs and the appointment of a third party to deal with the process. This should be one of the most important parts of any contract because the VAT liability could mean a difference of up to 20% in price.
And finally, as advisors, we need to be willing to give clear and unambiguous advice to our clients. That’s why they come to us in the first place and if the information is dealt with in the VAT notice or the VAT legislation, then our job is to explain it to out client. The only exception should be when the issue isn’t covered in the VAT notice and the legislation doesn’t deal with the specific situation.
Risk of doing business
If you’ve followed sensible procedures, such as obtaining professional advice, making sure that there are appropriate clauses in the contract, chances are that you will have charged the correct rate/amount of VAT.
Unfortunately, nothing in life or business is certain and there is a point where you have toaccept that some level of uncertainty is a risk of being in business.
Marie
October, 2014