According to some sources, HMRC has gathered a team of about two dozen experienced investigators to determine why primes have been avoiding the 20% charge to their top sellers as expected. The same sources claim that the tax office will be focused on the last 6 years of the unpaid VAT. Their main goal is to claim VAT back. The investigation can go up to 12 years in case there is significant evidence.
Nearly one billion pounds of funding annually is subcontracted across the ESFA funding channels. This means that the HMRC should expect about 40 million pounds per year only in a VAT. Although many providers say that they were not aware of this rule, the HMRC has pointed out that there is an official guidance that has been in force for years.
They have highlighted the fact that whenever a prime provider charges vocational training management fees to any subcontractor these fees are chargeable with standard VAT rates (20%). The industry is shocked because many providers are aware that the fines are quite rigorous. Some of them fear that if they have to pay taxes for more than one year that they will have to close their businesses. This is especially true for the small training providers.
Experts suggest that prime providers must check their past records and figure out how much VAT is included and who paid the VAT. Additionally, it may be a good idea to talk to HMRC representatives and tell them that they are looking at this potential issue now. Some experts believe that this could prevent harsh penalties.
It’s good to know that it all started about half a month ago when HMRC started an investigation in the Further Education sector related to the VAT. Their first claims were that FE providers have millions of pounds worth unpaid taxes.
In order to understand how this payment works, it’s better to use an example. For instance, the prime gets one million pounds worth government funding. The subcontractor invoices prime one million pounds. The prime invoices subcontractor 150.000 pounds for a 15% management fee and additional 30.000 pounds VAT. In the end, the prime pays 820.000 pounds to subcontractor and 30.000 VAT to the tax office.
In case HMRC investigators come to the providers, they will be interested in issuing penalties. These penalties can start with zero pounds and go up to 100% of the value. It all depends on the level of responsibility – lack of reasonable care, a deliberate mistake, deliberate and concealed activity.
The last two reasons can definitely ruin small and mid-sized service providers. If you believe that your future as a provider of such services is endangered with this VAT clampdown it may be a good idea to hire a professional accountancy expert. They can provide good advice for providers that may be affected by this clampdown. Of course, their services and activities will cost you a certain amount of money, but the fact is that you will get a chance to avoid those potential penalties.