In J & B Hopkins Ltd [2018] UKUT 0382, a subcontractor was held liable for VAT on work to a contractor who did not have to charge VAT. The subcontractor could not later recover the VAT because the contractor had gone into liquidation.
- A contractor was building a new place of worship for a charity. As such, the work was zero-rated. The taxpayer was a subcontractor who provided mechanical and electrical services to the contractor.
- The subcontractor mistakenly zero-rated its services to the contractor. The correct procedure is that the subcontractor charges VAT to contractor who claims it back as input tax. The contractor paid 11 invoices which showed no VAT. They were issued between November 2009 and November 2010.
- In November 2010, the contractor was put into administration. In November 2012, it went into liquidation.
- In 2013, the VAT issue was picked up during a compliance visit by HMRC. By this time the contractor had been liquidated and the assets distributed. This prevented the subcontractor from reinvoicing the contractor with VAT included.
- The subcontractor pointed out that, had it correctly invoiced the contractor, HMRC would have received no net VAT. All the sum paid by the subcontractor as output tax would have been recovered by the contractor as input tax. Making the subcontractor pay now meant that HMRC was unjustly enriched.
- The subcontractor also pointed out that under EU law, such as Case C-317/94 Elida Gibbs Ltd v CCE [1996] STC 1387, that the total amount of VAT that may be collected could not exceed the total payable by the final consumer. Making the subcontractor also contradicted the principle of fiscal neutrality.
- The first tier tribunal was unpersuaded by these arguments. The payments from the contractor should have been regarded as VAT-inclusive, so amounts of VAT were due by the subcontractor. If there was any unfairness, it was that the main contractor had not claimed input tax.
- The upper tier tribunal found no reason to depart from the first tier tribunal decision.
Comment
This case illustrates that there is no equity in tax. A simple mistake cost a subcontractor more than £200,000 which it could have avoided had it taken a little more trouble to check the correct VAT position.
It also shows that the principle of unjust enrichment apply to the detriment to the taxpayer but not to HMRC.
UPDATE: The Court of Appeal has refused the taxpayer leave to appeal.
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