In a largely unpublicised change, HM Revenue and Customs (HMRC) introduced “emergency” legislation on 1 February 2016, purportedly to combat the threat of VAT fraud in the wholesale telecommunication sector. The HMRC policy paper was published on 11 January 2016, allowing very little time for affected businesses to plan the introduction, although some dispensation has latterly been introduced.


From the 1 February a supplier of services falling within the scope of the legislation change must not charge VAT. Instead business customers receiving the service will be required to self-account for VAT using a process called “reverse charge accounting”.

The impact of this change is to reduce the cash flows of SME service providers and increase that of the large tele-communications networks.

This law change typically impacts suppliers of transmission or carriage services of airtime and telephony related data, but also impacts small service providers for whom the large telecommunication networks (such as BT and the Mobile Network Operators (MNOs) act as revenue collectors. These small service providers were still being first notified of the change by the major networks as late as the beginning of February, well after the law came into place. Some networks have yet to advise their smaller suppliers.


Previously SME telecommunication service providers would receive VAT from their customers monthly and (for those on the usual quarterly VAT return option) would pay this over the HMRC up to 3 months later. This cash flow advantage is now removed from these SMEs and passed over to the large networks, who now have to account to the authorities via the reverse charge rule.


The government’s idea is that in this way fraudulent owners of small telecoms businesses cannot use the telecoms networks to collect revenues (including VAT) and then “disappear” without paying the associated VAT over to HMRC and thus deprive the government of tax revenues.

However, this has obvious and significant cash flow implications, which benefit large businesses to the detriment of SMEs. For those businesses with significant telecoms services revenues collected from consumers on their behalf by the major telecommunications networks this can be hugely significant.

No comment so far from the small business czar, Anna Soubry. Yet as far back as October 2014, the FT reported findings by Capita Asset Services that the UK’s largest companies by market value were sitting on cash piles of £53.3bn, more than 40% up on the previous year. It also comes on top of the £26.8 billion owed to SMEs in late payments, reported by BACS in July 2015 and ironically known to be the cause of late payment of VAT to HMRC…


With this VAT change, at least in telecommunications, the government continues to favour big business and some SMEs will be hit especially hard…