One of the most common FAQs about VAT and renovations is how exactly you get the reduced rate on construction work. What if your contractor insists on charging 20%? Can you complain to HMRC? Can you claim a refund from HMRC?
The short answer is that it’s between you and your contractor/supplier.
If the work is done in the course of a “qualifying renovation” and the services are “relevant services”, the supplier can charge VAT at 5% on services and goods supplied in connection with the services.
That means that you have to convince your contractor/ that the 5% rate applies.
But that’s not always as easy as it sounds. Under the VAT rules, VAT registered businesses are ultimately liable for charging the correct rate of VAT and have to pay undercharged VAT to HMRC even if they haven’t charged it to their customer. In other words, the VAT butt stops with the contractor or supplier..
That’s why many contractors play it safe and charge 20% in case HMRC disagrees with the reduced rate. And unfortunately, you CAN’T claim a refund from HMRC if the contractor/vendor charges 20% and you think the 5% rate should apply. The VAT liability is between you and your contractor/supplier, the same as any other business transaction and HMRC will not get involved. You’re on your own.
That’s why it’s best to get the VAT liability of the construction work sorted out at the contract stage.
So just how do you do this?
You have to convince the contractor/supplier that the reduced rate applies by referring them to HMRC VAT Notice 708, Buildings and construction, section 8 read here , which explains when the 5% rate applies to renovations and alterations.
N.B. This bit of HMRC guidance is your bible when it comes to VAT. I’d suggest having the link on your phone/tablet ready to show to any prospective contractor/supplier.
In practice, you’ll find that some contractors/suppliers are aware of the rules and willing to apply the reduced rate, while others might never have heard about before. That’s why it’s important that YOU understand the rules so that you’re ready to explain things and refer to HMRC’s guidance.
Can I get a ruling from HMRC to convince the contractor?
No. Unfortunately, HMRC don’t normally give rulings in these situations. They don’t reply to queries from “customers” about VAT liability issues, because the ultimate liability lies with the VAT registered contractor/supplier.
And in most cases, they won’t give a ruling to contractors or suppliers if the issue is explained in the existing public guidance; usually VAT Notice 708.
So for the most part, YOU have to persuade the contractor that the 5% rate applies..
Ideally you should discuss the VAT liability of the work and agree the liability BEFORE signing the contract. The contract could include a clause that sets out which parts of the work are liable to VAT at 20% and which parts are liable to 5%. If the list of work is extensive, you could put it into a separate schedule.
However this isn’t always easy, especially if the solicitors and/or accountants aren’t familiar with the VAT rules about renovations. Unfortunately, accountants and solicitors rarely have the detailed knowledge and experience about this complex area of VAT, so it’s worth investing in advice from a third party VAT expert – whether an independent consultant or the VAT department in an accountancy firm – to get the best advice and help resolve any issues with your contractor.
Personally, if I were employing a VAT registered contractor, I’d definitely want to know whether or not my renovation qualified for the reduced rate. It’s your money and you don’t want to waste it paying too much VAT.
And, of course, if the contractor insists on charging 20%, then you can take your business elsewhere.
If you need assistance with any VAT related matters, please feel free to email Marie at firstname.lastname@example.org