VAT charges sees temporary staff hire costs soar

Recently, VAT has been even more of a headache than normal – with 2 rate changes in 13 months being the biggest. Barry Stocks, Director at BTG Tax, explains some of the other recent developments the leisure industry should be aware of

VAT changes to temporary staff

31 March marked the end of the concession allowing employment agencies to exclude VAT from the wage element when supplying staff. Under this concession, some employment agencies only had to charge the hirer VAT on its own profit margin or fee. Payments to staff (i.e. wages) and third parties (e.g. pension payments, PAYE, NIC) were deemed not to be subject to VAT. All this has changed. VAT will now be due on these payments where the agency acts as principal (where it genuinely acts as agent it will not be affected).

For most businesses the effect will be one of decreased VAT cash flow, putting even more strain on working capital requirements. However, if you are partly exempt and therefore unable to recover all the VAT you incur on your purchases and expenses, then the change may have a direct impact on you increasing the cost of hiring such staff.

So what should you do if you are in this category?

•   Partly exempt businesses should review their partial exemption method to see if another method could achieve a fairer result and then consider if you can directly allocate staff costs to taxable income;
•   Try to negotiate new VAT inclusive terms with the agency;
•   Subject to commercial and regulatory considerations, consider amending the structure so that the agency does not act as a principal.

Tax man For those businesses where any change will be a cash flow issue, try minimising the negative effect by, where feasible, timing the payments to the agency to be as close as possible to the end of the company’s VAT return period – thereby ensuring recovery (or set-off against VAT due) as quickly as possible.

New penalty regime

HMRC has introduced what it perceives as being a ‘simpler and more consistent’ penalty regime for tax errors covering VAT and other taxes. They mark a change from the previous VAT regime where a voluntary disclosure would normally take a tax payer outside the penalty regime. Under the new regime, a penalty will be levied unless you can demonstrate that you have taken ‘reasonable care’ if a mistake has been made.

So the million dollar question is; what is ‘reasonable care’? HMRC have sited the following examples:

•   Keeping accurate records to make sure your tax returns are correct;
•   Checking what the correct position is when you don’t understand something;
•   Telling HMRC promptly about an error you discover in a tax return or document after you have sent it – this will mitigate the penalty, and could possibly reduce it to nil.

Additionally, HMRC has stated “it is not unreasonable to expect a person who encounters a transaction or other event in which they are not familiar to take care to check the correct tax treatment and seek suitable advice”. They say that suitable advice is either using the HMRC helpline or a professional advisor.

This new penalty regime applies for return periods that are due to be filed on or after 1 April 2009.

So it’s as important as ever that you maintain focus on VAT compliance to minimise the risk of receiving a penalty.

New 4 year cap

Another change that came into effect on 1 April 2009 is the move from a 3 year ‘cap’ to a 4 year ‘cap’ for the correction of errors made on VAT returns and for HMRC VAT assessments.

Currently, under or over recovery of input tax or output tax, can only be corrected going back three years. The time limit will increase to 4 years, but because of the way the legislation is worded the change will not apply to VAT periods ending before 1 April 2006 because of transitional rules.

When is VAT due?

A common issue which continues to give the VAT man extra pounds for his coffers is that of incorrect tax points i.e. the point when the VAT becomes due!

If you receive a deposit for an event taking place at a later stage, you must account for the VAT on the deposit amount in the period you receive the monies. There are some deposits that don’t create a tax point (for example, returnable security deposits), so care is required.

Many accounting systems only account for VAT on deposits when the event has taken place, which may result in additional assessments and penalties (except of course if you have taken reasonable care!)

E-mail Barry Stocks.

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