HMRC has not yet completed a review started in 2017/18 of VAT charges for major transport projects. Some transport infrastructure bodies have been setting aside large amounts of money pending the outcome.
Government bodies can recover VAT on goods and services in an agreed list but not on others. Irrecoverable VAT is charged to the body’s relevant expenditure category or included in the capitalised purchase cost of non-current assets.
The DfT’s annual report records that a significant component of its accounting provisions during 2018/19 relates to “any charges that arise from HMRC reviews of HS2 Ltd’s and Highway England’s VAT statuses”.
It says: “In 2017/18 HMRC started to review how VAT is applied to HS2 Ltd’s activities. As at 31 March 2018, following ongoing discussions with HMRC, HS2 considered that the recognition of a provision covering the VAT reclaimed to date (£275m) was appropriate.
“As at 31 March 2019, based on current information, HS2 Ltd has recognised an accrual in the Financial Statements as the likelihood of HMRC ruling in HS2’s favour has reduced.” The accrual came to a total of £569m, which was a balance HS2 Ltd expected to pay HMRC in respect of an “impending ruling regarding HS2’s VAT status”.
“This change in VAT status represents an internal transfer within Government and does not change the net cost to the UK taxpayer of delivering HS2,” says the DfT. However, the National Audit Office warned in 2013 that public perception of the management of the HS2 programme could be adversely affected if the cost estimate increased to include VAT.
The DfT’s annual report also explains: “In 2017/18 HS2 Ltd provided for the over recovery of VAT, however, as the likelihood of HMRC ruling in HS2’s favour has reduced, the amount was transferred from provisions to accruals during 2018/19.”
Similarly, Highways England provided for over recovery of VAT in 2018/19. “Highways England has provided £98m for an outstanding HMRC ruling on specific tax regulations governing its ability to reclaim VAT on work that is either outside of the boundary of the current network or on structures.”
LTT asked HMRC why the review was taking so long and when the work would end. A spokeswoman replied: “HMRC is conducting normal compliance work on taxpayers and dealing with queries accordingly.”
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