For construction companies that are not based in the UK, it is vitally important to ensure you have registered for UK VAT in the correct way, and with a strong understanding of your legal obligations. Failing to do so can lead to significant financial costs for you and others involved in the transaction, as well as the risk of time-consuming legal disputes.

A First-Tier Tribunal ruling from 2014 offers a compelling illustration of how easy it can be for companies in this position to become embroiled in a dispute with HM Revenue & Customs relating to the VAT treatment of supplies of services, and the impact of applying for the wrong type of VAT registration.

A costly registration error

The dispute centred on Muster Inns - which owns a Devon-based pub, restaurant and B&B business called the Maltsters Arms - and its decision to engage Amberley Construction, a Guernsey-based construction company, to refurbish the property.

Amberley registered for UK VAT as a UK-established business and invoiced Muster Inns for the work done plus VAT, before Muster Inns claimed this VAT back as input tax on its VAT returns. However, HMRC decided that the construction company did not belong in the UK, and that its VAT registration and invoices were invalid as a result.

Instead of Amberley charging VAT that Muster could have recovered, this meant that Muster was liable to account for output VAT and recover input VAT under a reverse charge. When the case was referred to the First-Tier Tribunal, HMRC’s decision that the construction company was not UK-established was upheld, meaning Amberley could not be considered a taxable entity, that it could not charge VAT - and that Muster therefore could not claim it back.

The lesson for businesses

The decision highlights the fact that it is very easy to fall foul of the complex place of supply rules when providing land-related services in the UK.

The place of supply is the UK, with a liability to register for VAT if the land supplied is VATable land; however in the case of services relating to land supplied by a non-established supplier, it is optional for the company to either register for VAT as a non-established business, or for the customer to account for VAT under the reverse charge.

In general, most overseas businesses making supplies of services relating to land will register for UK VAT as overseas traders, and account for VAT on their onward supply, as this enables them to recover UK VAT incurred on related costs.

Had the construction company in this case registered for VAT as an overseas trader, there would be no argument that it was a UK-taxable entity that could charge UK VAT that its customer could recover.

In order to make sure your business never falls foul of these complex rules, it can be beneficial to seek professional guidance on your VAT obligations. Call our free VAT helpline on 0161 477 6600 to speak to our team of experts about how these rules might affect you.