Last time, I explained that the only way to get the 5% VAT rate on refurbishment, renovation works or alterations is to agree with your contractor or supplier, because you can’t claim overcharged VAT from HMRC. HMRC doesn’t give routine rulings about liability, so it’s a good idea to deal with VAT in the contract or sales agreement before the work begins to avoid unexpected VAT costs when you get the bill.
As well as the financial costs, dealing with VAT bills after the work has been done; especially if HMRC has issued a bill for under-charged VAT to the contractor; can cause a lot of hassle and stress for both you and the contractor.
Most construction contracts include standard VAT clauses, such as whether or not the contractor is registered for VAT; when the contractor/supplier is required to issue VAT invoices; or dealing with VAT on stage payments. This might be enough for a straightforward construction job where the work is all liable to 20% VAT, but it doesn’t deal with more complex issues that can arise with work that is eligible for the 5% rate.
Some solicitors are more VAT aware than others, so you may have to discuss the subject with your solicitor so they understand why you need to include additional VAT issues in the contract. The best starting point is HMRC’s VAT Notice 708: Buildings and construction, section 8, which explains the subject in some detail.
For VAT purposes, you’re not required to have a written contract and a lot of small businesses agree terms with their customers with simple contracts which don’t address VAT issues in any detail. But even if the value of the contract is relatively small, it’s still good practice to make sure that the VAT issues are covered if the 5% rate could apply. Either way it could save a lot of hassle later on in the process.
If a contract is silent on VAT, it usually means that the price includes VAT.
The VAT legislation doesn’t include much about contracts because commercial arrangements are a matter of agreement between the supplier and the customer. But if there’s no mention of VAT, then the price paid is normally regarded as VAT inclusive. This means that the contractor/supplier has to pay VAT out of the amount agreed in the contract, which would reduce their profit.
If you’re a contractor or supplier, make sure that any price quoted is exclusive of VAT so you can add VAT to the agreed price.
Evidence of “two years unoccupied”
One of the most important criteria for the 5% rate is that the property has been empty for two years or more, so the contract should include a clause stating that the property owner must provide adequate evidence. This is explained in more detail in HMRC VAT Notice 708; Buildings and construction, section 8.3. Section 8.3.2 explains the type of evidence that a contractor should obtain to support the 5% rate. The best evidence is a letter from the local council “Empty Property Officer” which is sufficient on its own, but HMRC’s notice gives examples of other evidence that would be acceptable.
Analysis of works
The best way of avoiding disputes with VAT is to agree things in advance and include this as part of the contract, usually as an appendix or schedule of works attached to the main document. The work can be listed, item by item, showing the agreed VAT rate and the contract will include a clause stating that the parties agree the VAT liability as shown in the appendix/schedule. VAT Notice 708, s 3.8 explains the type of work which qualifies for the 5% rate and the guidance is quite comprehensive.
What if HMRC disagrees?
The other important aspect is how to deal with disputes about the VAT liability, particularly if HMRC disagrees with the 5% rate and bills the contractor for undercharged VAT. The most important issues are:
- Who pays any underpaid VAT; the contractor or the customer?
- Should the customer be willing to pay for or share the costs of appealing? Maybe the parties could agree to be bound by advice from a third party with specialist VAT knowledge.
N.B: Please note that I’m NOT a solicitor so you should always be guided by your solicitor when it comes to legal and contractual issues. But it’s your business so make sure that potential VAT issues are properly covered to save money and hassle.
There’s more information about the contractual side of things in my ebook which can be found here.