VAT - 08.09.2020

Subcontractors - a VAT trap

The First-tier Tribunal (FTT) recently considered the VAT position of a business which used subcontractors to carry out its work. HMRC claimed the business was responsible for VAT on the subcontractors’ services. What was the FTT’s decision?

Subcontracted work

It’s common practice for kitchen design, double glazing, guttering, etc. firms to use subcontractors rather than, or in addition to, employees to carry out work for their customers. This can add a layer of complication to VAT accounting, as Marshalls Bathroom Studio Ltd (MBS) discovered when HMRC hit it with a VAT assessment for £22,000. MBS appealed against it. The dispute was considered by the First-tier Tribunal (FTT).

Paying for “a complete service”

The FTT identified the following as key factors in arriving at its decision. MBS’s marketing bumph offered its customers a “complete service” from design to fitting. For the latter it used a combination of employees and subcontractors. MBS is VAT registered but often the subcontractors it used were not.

When jobs were completed MBS invoiced the customer for a VAT-inclusive amount but did not show how much VAT the customer was being asked to pay. This was a breach of the VAT invoice regulations.

The invoices did include instructions for payment to be made part to MBS and part direct to the subcontractor. MBS only accounted VAT relating to the money it received from the customer and ignored payments made directly to the contractors. HMRC’s argument was that the value of MBS’s supply was the total amount paid by the customer including that paid to the subcontractors.

HMRC’s argument

HMRC said that the contract between MBS and its customers was for the supply of a fitted bathroom, i.e. it included the fitting services. To support this it pointed out that customers only dealt with MBS, for example, questions or complaints about the fitting had to be raised with it and not the contractors (although the contractors did any remedial work needed). Plus, it and not the customer chose which fitters did the work.

Reality check

It wasn’t difficult for the FTT to rule in favour of HMRC. It seems the only steps MBS took to separate its services from those of the contractors was to ask the customer to pay them direct and muddy the waters by issuing dodgy invoices. The reality was that customers were paying for MBS to supply a fully installed bathroom. The VAT liability follows the person/business who made supply and not the person who received payment.

Separation is possible

If you want to keep the cost of a job down by using VAT unregistered subcontractors, it’s possible if you’re careful:

  • offer your customers a list of recommended subcontractors, but don’t tie them to it
  • if you’re invoicing for the whole job, show the subcontractors’ charges as a separate item and include the subcontractors’ invoice which should ideally be addressed to the customer with you acting as no more than a handling agent
  • make it clear in your contract with the customer what you’re supplying. There’s no need to mention the subcontractor other than perhaps to say that the fitting etc. work should be arranged direct with them and not you.
The FTT ruled in favour of HMRC. Apart from asking its customers to pay the subcontractors directly for their work, the business held itself out as responsible for the whole job. Its contracts and invoices also reflected this. Avoid falling into the same trap by keeping a clear distance between you and the services provided by your subcontractors.

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