Disabled Facilities Grants and VAT – New HMRC Campaign

HMRC is asking councils how they treat Disabled Facilities Grants (DFGs) for VAT. How you answer the questions could avoid unnecessary VAT liabilities.

Background

We have seen letters that HMRC is sending local authorities asking several questions about DFGs and DFG administration fees. Specifically, HMRC asks:

Outputs

  • Does the council make any charge to the recipient of the grant for administering the works or in applying for Disabled Facilities Grants by taking a percentage of the grant funds for this purpose?
  • If so, how does the council treat this charge for VAT?
  • If treated as standard rated could you, please provide evidence that you are doing so?
  • If treated Outside the Scope or any other way could you provide details of income for the last 4 years?
  • If you have not charged VAT and believe this to be correct provide the rationale behind this.

Inputs

  • Has the Council reclaimed any VAT in relation to DFG in the last 4 years?
  • If so, could you provide a breakdown of the input tax claimed?
  • If none has been claimed could you detail processes in place to prevent this being claimed?

The questions about Inputs are uncontroversial, as it has been established for some time (as HMRC says) that the supply of building works is to the grant applicant, not the local authority.

However, the questions about Outputs are controversial. There is a live appeal – led by Portsmouth City Council – about the correct VAT treatment of DFG administration fees. HMRC contend they should be standard rated while we believe they should be exempt.

If you have treated DFG administration fees as exempt, HMRC will likely assess for the last four years of VAT on the fees, potentially with penalties as well. Therefore, while you must tell HMRC if you have not charged VAT, it is crucial to respond to the letter’s questions to protect your authority’s position.

We are advising several local authorities who have also appealed and are “sitting behind” Portsmouth City Council. If you’d like to discuss this further, please contact Nick Burrows at nick.burrows@pstax.co.uk.

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Nick Burrows

Written by Nick Burrows

Nick has nearly 30 years of working with and supporting public sector bodies with VAT and indirect taxes, starting at HM Customs and Excise and then as in-house VAT Officer at Hampshire County Council. Since moving to advisory firms, Nick has had senior public sector VAT roles at RSM Tenon (now RSM), KPMG, and PSTAX (since 2014). He has led VAT advice nationally on a wide range of public sector issues and helped shape HMRC policy in several key areas.

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