HMRC has launched a major investigation into subcontracting that could result in tens of millions in fees and fines after it discovered many colleges and training providers are ignoring VAT rules on management fees.
FE Week understands that the tax office has put together a team of around 20 special investigators, who will find out why primes have not been applying the 20-per-cent charge to their top-slices, per the rules.
HMRC plans to investigate up to six years of unpaid VAT and will attempt to claim it back.
This could rise to 12 years if evidence is found that prime providers knew about the charge and failed to apply it anyway.
Substantial fines are also likely, according to one VAT expert who spoke to FE Week.
The news will send shockwaves through the sector, and providers fear the business and ramifications of any fresh charges.
Government rules – VAT Notice 701/30 (pictured) – state that while vocational training is exempt from the tax, management services in subcontracting relationships are not. This comes alongside the top-slice primes generally charge subcontractors, which is usually around 20 per cent of the government’s funding.
However, evidence seen by FE Week suggests the VAT rule is unknown to most providers, and has not been applied for years, meaning that hardly any has been claimed.
Around a £1 billion of funding per year is subcontracted across the ESFA post-16 funding streams, which FE Week estimates would generate around £40 million per year in VAT for HMRC.
For its own part, HMRC claimed the guidance has always been in place and in force.
“Vocational training management fees charged by a prime provider to a subcontractor are chargeable with VAT at the standard rate of 20 per cent,” said a representative.
“This applies regardless of whether the charge is netted off against government funding or whether the prime provider is a college of further education or a private provider.”
The spokesperson added that any under-declarations of VAT will be dealt with under the tax office’s usual compliance procedures.
Management fees charged by a prime provider to a subcontractor are chargeable with VAT
The sector will be worried that any fines or attempts to retrieve years of unpaid tax would plunge many small training providers into financial trouble.
Shane Mosley, a partner at accountancy specialist Malcolm H Preece, has offered advice to providers who have not complied with the rule and what the next steps are to take (see below).
“Prime providers should look back over their records and ascertain both how much VAT is involved and crucially who this VAT should have been charged to,” he told FE Week.
“They should also consider making initial contact with HMRC to put on record that they are aware of the potential problem and are currently looking into their own compliance – this will potentially mitigate penalties due to the cooperation of the taxpayer.”
If HMRC does come knocking, as well as any VAT that should have been charged, inspectors may be looking for penalties and interest.
“For a situation like this which appears to be an industry-wide error, rather than any individual concealment, I would envisage the initial fine to be at the lower end, perhaps 10 to 15 per cent.”
This is the second VAT crackdown HMRC has made against FE providers in the past two weeks.
On February 13, FE Week revealed that private providers were being let off millions of pounds in unpaid tax because HMRC had given them incorrect advice.
ITPs believe the crackdown will mean learner volumes will drop significantly.
Advice from a VAT expert: Expect 10- to 15-per-cent fines
Shane Mosley, a partner at accountancy specialist Malcolm H Preece, spoke to FE Week about what actions HMRC is now likely to take, and offered advice for affected providers.
“Prime providers should look back over their records and ascertain both how much VAT is involved and crucially who this should have been charged to,” he said.
“Are these subcontractors VAT registered themselves enabling to (potentially) claim back some or all the VAT from HMRC? Do they still exist?
“They should also consider making initial contact with HMRC to put on record that they are aware of the potential problem and are currently looking into their own compliance – this will potentially mitigate penalties due to the cooperation of the taxpayer.
If HMRC comes knocking it will be looking for penalties and interest
“If HMRC comes knocking, as well as any VAT that should have been charged, it will be looking for penalties and interest.
“Penalties are anything from zero per cent to 100 per cent, on the following bands: zero to 30 for a lack of reasonable care; 20 to 70 for a deliberate mistake; or 30 to 100 for something deliberate and concealed.
“For something like this which appears to be an industry-wide error, rather than any individual concealment, I would envisage the initial fine to be at the lower end, perhaps 10 to 15 per cent.
“It would then be down to the individual provider to prevent this going any further by conversing with HMRC in a timely and honest manner.
“In some cases, where an industry-wide problem has been identified, HMRC has levied at zero per cent as long as the other party acts in a transparent way, but management charges will be looked at by HMRC as an ‘error’ as opposed to a ‘lack of understanding’, and therefore it is my belief that at least 10 to 15 per cent will be levied as mentioned above, should HMRC pursue this.
“Finally in terms of time, HMRC actually has the power to go back 20 years in some cases. Standard procedure, which I believe will prevail here, is the normal four-year window open to HMRC without opening a specific enquiry.”