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HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: employer compliance: guidance by subject: settlement: direction under regulation 72F: impact on VAT

Where an individual is registered for VAT and is subsequently re-categorised as an employee then, unless the individual is otherwise in business, the registration becomes an invalid registration. You will need to liaise with indirect tax colleagues in these cases.

If the registration is invalid the registration should be cancelled following the procedures in the VAT Deregistration Manual (VATDREG). The removal should be effected under the provisions of the VAT Act 1994, Schedule 1, Paragraph 13(3).

Calculation of PAYE

If the worker provides an invoice for £1000 plus VAT and HMRC discover that there was a contract of employment so that PAYE should apply - HMRC will charge PAYE on the £1000 not on £1200.

Amending the VAT record

When a registration is considered invalid, this means that the trader was not a taxable person, so VAT is not payable on stocks and assets. Neither is there any entitlement to input tax. The VAT account can be cleared by, either

  • a refund to the trader, subject to the defence of unjust enrichment where appropriate; or
  • recovery of an amount from the trader

whichever is applicable.

The corrective action you should be take is as follows

  • in periods where the trader has made a net payment to us, a refund of the amount paid may be made under section 80 VAT Act 1994, subject to capping and unjust enrichment consideration.
  • in periods where the trader has received a repayment, an assessment should be made to recover the repayment under section 73(3) VAT Act 1994, subject to capping.

Further guidance can be found on VAT refunds in the VAT Refunds Manual (VR).


If you suspect evasion you should notify your local CCT Team and suspend your action until told otherwise by them.

Amounts claimed by the Employer

If the trader has been declaring VAT and his employer has been incorrectly recovering the VAT as input tax (albeit in good faith), you may be entitled to assess the employer for the over claimed input tax under Section 73(2).

However, recovery can be waived in certain circumstances if these are similar to those envisaged by Extra Statutory Concession 3.9; please refer to the VAT Input Tax Manual (VIT).

Visits to Traders

There is no need to visit the trader to calculate the amount of tax to be adjusted or for control purposes, unless it is considered essential.

You can find full guidance on schedule 11 demands in the VAT Assessments and Error Correction Manual (VAEC), and guidance on section 80 claims in the VAT Refunds Manual (VR).