1
VAT FOR DIY RESIDENTIAL PROPERTY
DEVELOPERS
How to save VAT if you're building or converting your family home
2 Marie Stein has worked in VAT since 1982, starting as a VAT officer with HM Customs & Excise. She moved to became a VAT consultant in the accountancy profession in 1986, and has run her own successful consultancy business since 2010 through her website
"vatexchange.co.uk".
Marie's aim is to make the subject of VAT more accessible to businesses, accountants and anyone who needs to know about VAT. She has published three books on the subject:
VAT for residential property developers and contractors VAT for DIY property developers
VAT on intercompany transactions and management charges
VAT mistakes can have a significant effect on the financial viability of transactions, whether it's sharing out the office insurance or a major property development. And because VAT is a
transaction tax, it's usually impossible to change things after the event. Marie explains the complex rules in everyday English (as far as possible) and discusses commercial issues in practical terms to show how VAT applies to everyday transactions.
3
Foreword
This book is for those of you who are planning to do your own DIY property developments
to create, convert or refurbish a dwelling for your own or family use.
These include:
Building a new dwelling for you or your family.
Converting an existing commercial property to create a new dwelling.
Changing the number of dwellings in a building.
Renovating, altering or repairing a dwelling that has not been occupied for two years or
longer.
Renovating a dwelling that has not been occupied for ten years or longer.
It explains when you can save VAT on costs and when you can claim VAT on costs from
HMRC under the VAT DIY refund scheme.
The book also contains some information for those of you who are considering developing
residential property as a business activity or holiday lets. It includes useful information
about when you might have to register for VAT and an introduction to the complex rules
about VAT and commercial property.
If your development is for business purposes; e.g. to be sold or let to third parties, then you cannot claim VAT under the DIY refund scheme. The DIY scheme is ONLY for private individuals who are building or converting for personal use; e.g. their family home. If you are developing for business purposes, please refer to my book "VAT for residential property developers and contractors" which explains how the VAT rules apply to
businesses.
The VAT and property rules are complicated and it's easy to make expensive mistakes
when you don't understand how they apply to your own situation. You need to do your
research before you start spending any money and work out the most VAT efficient way
4
VATWoman's Guide to VAT for DIY property developers
How to save VAT on self-builds, home conversions and renovations
Contents
Introduction...15 SECTION 1 IMPORTANT INFORMATION THAT EVERYBODY NEEDS TO KNOW...18 Chapter 1 VAT and residential property development...18 About the zero-rate or the reduced rate
How VAT works
How do you get the zero-rate or 5% relief How VAT works
The VAT fraction
What if your supplier/contractor wants written confirmation from HMRC? Definitions and dwellings
Composite and multiple supplies VAT invoices: 25
The VAT fraction: 26
Chapter 2 So what exactly IS a conversion then? ...27 Conversions
Reduced rated conversions
DIY claims: "non-residential conversions" In practice
Property developers and conversions And it's not just VAT...
Chapter 3 Claiming VAT from HMRC: Introduction to the DIY refund scheme...31 What exactly is the DIY refund scheme?
Do I have to do the work myself? How do I apply?
o VAT 431NB: New build
o VAT 431C: Conversions What can't I claim?
Personal or family use
Chapter 4 Money and contracts...35 Zero-rated new construction
What sort of conversions and renovations qualify for the reduced rate? How do you get the zero-rate or 5% relief?
5 What if the contractor refuses to charge 5% unless I have a letter from HMRC?
If my contractor has to pay the difference to HMRC, how much does this cost?
But if my contractor can claim back at 20% then only charges 5%, doesn't that mean he is making a profit of the 15% difference?
I've paid 20% on goods and materials for a conversion - how do I claim the difference between the 20% and 5%?
So why not have everything done by non-registered contractors and save VAT that way? Why not just pay in cash to avoid VAT altogether?
Architects, surveyors, project managers...
Chapter 5 Practical issues: budgeting and planning rules ...45 Dealing with VAT from Day 1
o Budgeting
o Start from the worst case scenario
o Cashflow
Getting the details right Dealing with VAT on contracts
o So who is liable for under-charged VAT?
o Minimizing the risk
o The contractor's perspective Planning issues
Conversions and permitted development rights
Changing plans during the project: do you need revised consent/approval
Introduction to the case studies... ...52 Case study 1: DIY self-build: 53
Case study 2: DIY home conversion: 54 Working out your own VAT cost: 55
SECTION 2 HOW TO SAVE VAT ON COSTS...56 Quick reference guide 20 ways to save VAT...56 Chapter 6 How to buy your property VAT free: VAT 1614 certificate... 58 Why do commercial property owners have to charge VAT?
How to buy opted commercial property VAT exempt: the VAT1614D procedure When can I use the VAT1614D?
How do I do it?
o When is the price "legally fixed"?
o When can I issue the VAT 1614D to the vendor? Where do I get the form?
Building land
6 The vendor’s VAT position: the 2-price scenario
Issuing certificates before the price is legally fixed Keep a record of the events
What your solicitor needs to know
Buying VAT free can reduce your stamp duty as well
Chapter 6 Appendix FAQs about the VAT 1614D procedure...64 What if I'm buying at auction?
Do I need planning permission for conversion work before I issue the VAT1614D? What happens if I’m late with my certificate?
What if I don't use the property as intended when I bought it? What if the property contains an existing dwelling(s)?
What if there are tenants in the property? Buying VAT exempt in other situations
What if I’m buying a "new" commercial property to convert into a home?
Chapter 7 Zero-rated new construction...68 How does it work in practice?
VAT planning in advance
Definitions: what's a "qualifying" dwelling? What's a "new" dwelling?
What are "qualifying services"? Building materials
Other residential and charitable use properties Listed buildings
Apportionment
Chapter 8 Reduced rate for conversions and renovations ...75 How does it work in practice?
What's a "qualifying conversion"?
o Three types of conversions
Mixed conversions and refurbishments: is it a business activity? “Qualifying properties” for conversions
Renovating or altering "Qualifying residential premises" Reduced rate for qualifying conversions.
o Converting parts of property
Reduced rate for qualifying renovations.
Which conversion and renovation services qualify for the reduced rate?
7 Chapter 8 Appendix Converting, renovating, repairing a single building at the same time...85 Chapter 9 Building materials...99 Goods and materials used in construction work
What are building materials?
Zero-rated construction and reduced rated construction
o New construction
o Renovations, conversions
Chapter 10 Other important practical issues...93 What’s always standard rated even in zero-rated new construction and reduced rated qualifying
conversions and renovations? When is “completion”?
Mixed developments: apportioning the price between work at different rates.
o Work done before completion
o Work done after completion Garages.
Planning permission; building consents: why it matters. Listed buildings
Chapter 11 Saving VAT with single contractors and design and build... 97 How it works
Engaging a third party contractor Design and build services
Chapter 12 Specific VAT reliefs on other construction services...102 Redecoration, alterations, repairs and maintenance work
Work carried out in the course of qualifying conversion or renovation Installation of energy saving insulation
Installation of grant funded heating measures Adaptations for the handicapped
Adaptations for the elderly
Case studies Part 2 VAT on costs... 106
SECTION 3 DIY HOUSE-BUILDERS AND HOMECONVERTERS CLAIMS...108 Chapter 13 Are you eligible for a DIY refund scheme claim?... 109 New construction
Conversions
8
o What’s a dwelling?
o Non-residential conversion
o Conversions of mixed residential and commercial properties
o The “ten year unoccupied rule” VAT savings on contractors’ services
o Reduced rated conversion services
o Building materials
o Contractors must apportion costs
o You can only claim VAT “correctly charged” under the DIY Refund scheme
o Get as much work done before completion as possible Working with your contractor
Listed buildings
Chapter 14 What can you claim?... 117 Property: NO
Goods: SOME Services: SOME
The “design and build” anomaly
What happens when VAT is over-charged or incorrectly charged?
Chapter 15 How to make a claim...122
Chapter 16 When things don’t go to plan ... 123 What happens if you can’t live in the property when it’s completed?
What happens if your intentions change during the construction process?
Chapter 17 Converting pubs and other commercial properties with existing residential
accommodation... 126
When you can save VAT if you’re buying a commercial or mixed property Properties with existing self-contained dwellings and the “90/10” split
When you can save VAT on reduced rated conversion services and renovations Properties with no existing self-contained dwelling
Properties with existing self-contained dwellings
When you can claim VAT on non-residential conversions
The difference between reduced rated conversion services and non-residential conversions The self-contained anomaly
Commercial developers, the DIY Refund scheme and the zero-rated anomaly
9 SECTION 4 OTHER STUFF AND THE FAQS... 133 Chapter 18 Property development as a business activity... 133 What do you want to do? Develop and sell or develop and lease? Or both?
How does this apply to residential property development?
o Zero-rated sales
o Listed buildings
o Holiday lets
VAT registration and claiming VAT on costs Introduction to commercial property
Chapter 18 Appendix Claiming VAT on costs...139 Chapter 19 Holiday accommodation...... 142 What is a holiday let?
Dwellings used as holiday lets Income from holiday lets Tour Operators Margin Scheme VAT recovery and partial exemption Using your own home for holiday lets
Chapter 20 Commercial house builders and self-build/conversion projects... 148 What if the building is completed and then the builder decided to live in it?
Sole proprietors and partners Company directors
When you have to pay VAT to HMRC: "deemed supplies"
Chapter 21 FAQs... 151 Introduction to the FAQs
Section 1 Goods: building materials and installation...154
1.1 Vanity units: 155
1.2 Electric gates and doors: 157 1.3 Integrated units: 158
1.4 Landscaping, plants, trees etc: 160
Section 2 Services and other issues... 164 2.1 Detached garages: 164
2.2 Hiring equipment: 165 2.3 Scaffolding: 166
10 2.5 Delivery: 167 Appendices... 168 Appendix 1 HMRC Notices: 168 Appendix 2 Definitions: 169 Appendix 3 Apportionment: 171
Appendix 4 Extract from "VATWoman's Guide to VAT and residential property development: Being a VAT registered business: 174
11 VAT for DIY property developers
This book is a guide about the way that the VAT rules apply to residential property developments, based on my interpretation of the legislation and HMRC guidance at the date of publication. It DOES NOT cover every possible scenario nor does it replace formal advice on specific situations. Please take proper advice to be certain about the VAT implications of your development and avoid unexpected VAT issues along the way.
The main VAT rules are summarized for the purposes of this book and their relevance to residential property developers. Links to HMRC’s guidance on the subjects discussed in this book are included throughout the book and you must refer to HMRC's guidance for full and detailed information about any subject.
This is the second edition of the book. The content has only changed to include details of some minor changes in policy about zero-rated new construction announced by HMRC in 2017, which are explained in Chapter 7.
Marie Stein March, 2018
12 Copyright
The copyright of this book belongs to the author and neither the whole nor any part of this book may be reproduced in any form without the author’s express permission, other than material from HM Customs and Revenue publications, which are available on HM Customs and Revenue website www.hmrc.gov.uk.
Marie Stein March, 2018.
13
Introduction
If you're doing any sort of DIY project to create your own home, you NEED to read this book. Doing any sort of DIY project - from new construction to conversions to renovations - is an expensive and time consuming exercise. VAT can add up to 20% to your costs; you'll pay it on goods, materials, contractors fees or even on the property itself. You might be able to claim some of the VAT from HMRC, but you need to understand how the VAT rules work to keep your VAT cost as low as possible. That's why it's REALLY IMPORTANT that you get the VAT correct right from the start.
This book will help you to understand how the VAT rules work so that you can save as much VAT as possible and manage the VAT process efficiently. It's for those of you with little or no VAT knowledge who need to know how VAT applies to their property development and how to save as much VAT as possible.
N.B. This book is primarily written for those of you who are developing property for personal or family use. There is some information about selling and renting as a business activity in the book, particularly in Chapters 18 - 19 and Appendix 4. You can also find more detailed guidance in my book: "VATWoman's Guide to VAT and residential property development"
This book is in 4 main sections:
Section 1: Chapters 1-5: Important information that everybody needs to know: includes a brief introduction to how VAT works and practical stuff that will help you deal with your development from planning to completion.
Section 2: Chapters 6-12: VAT on costs. These chapters are all about saving VAT on costs including buying commercial properties for conversion VAT exempt; the zero-rate for new construction and the reduced rate for certain conversions and renovations/renovations.
Section 3: Chapters 13-17: DIY VAT refund scheme. This section explains how theDIY refund scheme works, who is eligible to use the scheme and how to make a claim.
Section 4: Chapters 18-21: specialized chapters. These include an introduction to VAT for those of you considering property development as a business and holiday lets. Finally, Chapter 21 answers those FAQs about common problem areas, e.g. VAT on electrical appliances, garages and the perennial problem of vanity units.
I can get this information from HMRC. So why do I need this book?
Yes, you're right. HMRC provide very good and well written comprehensive technical information about construction services in HMRC VAT Notice 708: Buildings and construction
http://tinyurl.com/mod94mc. The DIY claim forms (the VAT 431B and 431C) and guidance notes http://tinyurl.com/gu4zz9m explain when and how you can make a DIY VAT refund.
Learn how the
VAT rules
work from the
start, to have
the best
chance of
saving VAT
14 Surely I can ask HMRC for more help on the VAT helpline if I'm
confused?
Yes, and the officers will do their very best to help you. And if you're making a DIY refund claim you can contact HMRC's dedicated DIY Refund scheme office, who have a lot more specialist knowledge.
However they can't possibly deal with every hypothetical scenario and their guidance can be difficult to follow, especially if you're new to VAT.
Also, HMRC's guidance doesn't include much practical guidance and they don't get involved in disputes with contractors about VAT liability. So if your contractor insists on charging 20% instead of 5%, it's up to you to convince the contractor otherwise.
That's where this book comes in. I've included lots of practical advice to help you, whether you're dealing with contractors or HMRC and explained the rules in "plain English", as far as possible, Main problem areas
And these are just some of the main problem areas covered in this book:
Sometimes contractors don't understand when the 5% reduced rate applies. The difference between 5% and 20% can significantly affect your overall budgeting. DIY claims can be delayed or even rejected because of simple mistakes.
You can only ever claim VAT that has been correctly charged which means that YOU MUST KNOW the VAT liability of contractors' services right from the start of the project.
Claims are rejected if the planning permission isn't correct
There are different criteria for DIY VAT claims depending on whether you're doing a new build and or a home conversions.
Definitions: conversions and dwellings
One of the most common problems with VAT and construction is the definitions, including several different definitions of the words "dwelling" and "conversion". A good example is the word "conversion", which has two different definitions; one applies to the 5% VAT rate on conversion services and one to DIY home-converters claims - see Chapter 2.
This means that even though your contractors' services may qualify for the 5% rate, you may not be eligible to claim the VAT under the DIY refund scheme.
The definition of "dwelling" also causes a lot of confusion - there are at least 3 separate definitions in the law, as we'll discuss throughout the book.
What is the "VAT cost"?
Throughout this book, I'll be referring to the "VAT cost" of your self-build project. Usually , this is simply the VAT that you pay to contractors and other suppliers.
If you're eligible to make a DIY refund claim the "VAT cost" is the difference between:
It's a dwelling,
Jim, but not as
15 the VAT you pay on your goods and services; and
the amount of VAT you can claim from HMRC. And finally, why doesn't HMRC just write a list?
I'm often asked why HMRC doesn't provide lists of all goods or services that qualify for the zero-rate or reduced rate and every possible type of expenditure that you can claim under the DIY refund scheme. Their guidance does include some very helpful lists, but unfortunately it's simply impossible to cover every possible scenario.
I've discussed some of the most frequently asked questions in Chapter 21, but please contact me [email protected] if you have any other queries and I'll do my best to help.
In the meantime, I hope that you end up with a beautiful home and this book helps you to save as much VAT as possible.
16
Section 1: Basic information that EVERYBODY needs to know
Chapter 1: How VAT works
Before you can understand the detailed rules of how to save VAT, you need to understand how VAT works. PLEASE read Chapters 1 - 5 as the content will help to save you time later on.
How does VAT work?
The VAT fraction: VAT exclusive and VAT inclusive values It's up to the contractor
When you can save VAT on your costs
o Buying commercial property for conversion VAT free
o Contractors' services
o DIY Refund scheme
o How can you save the most VAT?
o What if I pay too much VAT?
Definitions: dwellings, conversion and other criteria Converting or renovating for lease or sale
What if things don't go to plan? VAT invoices
Apportioning VAT for work on common areas of a property How does VAT work?
So how does work in practice?
VAT is a tax on the sale of goods and services. Businesses have to register for VAT and charge VAT if their income exceeds the VAT registration limit, which is currently £85,000 per year (April, 2017). There are 3 different rates of VAT:
the standard rate of 20% the reduced rate of 5%; and the zero-rate*
These are called "taxable supplies". VAT registered businesses who sell taxable goods and services can claim VAT on their costs. The VAT on their sales is output tax and the VAT on their purchases is called input tax.
*There is also another class of sales which are exempt from VAT. Like zero-rated sales, the business doesn't charge VAT on their sales but because their income is VAT exempt, they can't normally claim VAT on their purchases. For example, if you're currently renting your home, the rent is VAT exempt so your landlord can't claim VAT on his costs. Sales of existing dwellings are also exempt from VAT. The VAT fraction: VAT exclusive and VAT inclusive values
If you're buying goods directly from retailers, then for smaller value items the invoice may just show the gross value and the VAT rate; e.g. "goods: £190 including VAT@20%". You might assume that
17 the VAT is 20% of the value of the goods, but actually that's not how it works, because the VAT is 20% of the NET value of the goods.
The gross price is therefore 120% of the net price.
The VAT fraction is the VAT element of the gross price represented as a fraction: 20% VAT = 20/120 = 1/6
5% VAT = 5/105 = 1/21
I've explained the arithmetic in a bit more detail on page 27, but hopefully you won't need to calculate the VAT yourself very often.
It's up to the contractor
Because VAT is a self-assessed tax, VAT registered businesses charge VAT to their customers and pay the difference between the VAT on their purchases and VAT on their sales to HMRC. The businesses normally submit VAT returns and payments every three months.
This means that the business has to decide whether their sales of goods and/or services are liable to 20% VAT, or qualify for the 5% or zero-rate, or even exemption from VAT. It’s their liability to get it right. If they charge 5% for work that HMRC believe is liable to 20% VAT, they have to pay the difference to HMRC as I've explained in Chapter 4. That's why contractors are often very cautious when it comes to applying the zero-rate or reduced rate.
How to save VAT on your costs
There are 3 ways to save VAT on residential property development: Buying commercial property for conversion VAT free
If you're buying commercial property to convert to residential for personal or family use, the vendor may have "opted to tax" the property. This normally means he has to charge VAT on the sale of the property, but you can't claim this VAT from HMRC. However, you can prevent the vendor charging VAT by issuing the VAT1614D certificate to the vendor before the price is legally fixed, which requires the vendor to sell the property VAT exempt. This means that you save 20% on the purchase of the property, which is probably the single largest saving you can make. See Chapter 6 for detailed information about the VAT 1614D procedure.
There is a similar procedure for individuals who want to purchase land to build their own homes, also explained in Chapter 6.
Contractors services: zero-rated new construction and reduced rated conversions/renovations The zero-rate applies to construction of new dwellings. The reduced rate of 5% applies to building services in the course of certain qualifying conversions and renovations.
18 The zero-rate and reduced rate normally also apply to "building materials" supplied by the
contractor in the course of those building services, from bricks and mortar to fitted kitchen furniture. See Chapter 9 where I've explained the meaning of "building materials" in more detail.
Claiming VAT under the DIY VAT refund scheme.
The DIY refund scheme applies if you're building your own home or converting a property to create a new dwelling. If you're building a new home, you can claim VAT on "building materials" that you buy direct. If you're doing a conversion, you can normally claim VAT on "building materials" that you buy plus VAT on your contractor's services.
See Chapter 2 where I've explained the main differences between the meaning of "conversion" for reduced rate construction services and for the purposes of the DIY refund scheme.
How can I save the most VAT?
How to reduce your VAT cost depends on your specific circumstances and how you want to do things.
For example, if you employ a VAT registered contractor to supply and fit a new boiler in your renovation and the renovation qualifies for the reduced rate of VAT, as explained in Chapter 8, the contractor can charge 5% for both his labour and the new boiler.
However, if you buy a boiler direct from a builders’ merchant and engage the VAT registered contractor to install the boiler, then you have to pay 20% on the boiler,
although the contractor can charge 5% for his services. But which saves the most VAT? Well it depends on all sorts of things, e.g. the contractor's mark-up to the cost of the boiler? Does the retailer charge more for delivery if you buy direct? What about employing contractors who aren’t registered for VAT so that you don't pay any VAT on labour?
Usually, you'll pay less VAT if the proportion of the goods and material is higher than the labour costs and you employ a VAT registered contractor to supply and install at the 5% rate.
Either way, the only way calculate the most VAT efficient way to arrange your expenditure is to do your own calculations, based on how much you expect to spend on goods and your contractors' estimates. I've discussed this in more detail with examples in Chapter 4.
If you buy goods
directly, e.g. a new
boiler, you have to pay
20% VAT. You
CANNOT claim any
VAT from HMRC
even if the
contractor's services
qualify for the
zero-rate or 5% zero-rate.
If the contractor
charges 5% for work
that HMRC say
should be standard
rated, the contractor
19 What if I pay too much VAT?
Even if you're eligible to make a DIY refund scheme claim or you're registered for VAT as a business, you can't claim all of the VAT you pay from HMRC.
There are 2 reasons for this. First, neither DIY VAT claimants nor VAT registered businesses can claim VAT on certain goods and materials, such as carpets, certain electrical appliances, fitted furniture. I've explained this in Chapter 9.
Second, YOU CANNOT CLAIN VAT THAT HAS BEEN OVERCHARGED. For example, if you pay 20% VAT for services that qualify for the zero-rate or 5%, you can't claim ANY of the VAT. More about this in section 3 about the DIY refund scheme and Chapter 18 about property development businesses. Definitions: dwellings, conversion and other criteria
The issue of definitions is very important because the zero-rate and reduced rate only apply if certain conditions are met. These include specific criteria for the words "dwelling" and "conversion". What does this mean? As I explained in the Introduction, there are at least three different
definitions of the word "dwelling" and two of "conversion" when it comes to VAT and property. I've discussed the two different meanings of "conversion" in Chapter 2. One definition applies to the VAT liability of construction work when the reduced rate applies, while the other applies to conversions that qualify for the DIY refund scheme.
There is more detailed information about this in Chapter 8 which deals with the 5% reduced rate and Chapters 13-17 that deal with the DIY refund scheme. I've also included the main definitions of "dwelling" in the Appendix.
However, that's just where it starts. As you'll see in Chapters 7-8 and VAT Notice 708, the zero-rate or 5% VAT reliefs for construction services only apply if very specific criteria are met.
For example, a new dwelling only qualifies for the zero-rate construction or the DIY refund scheme as long as any previous dwellings on that site are demolished to ground level.
Zero-rating also applies if certain party walls or certain facades are retained. However, if you want to retain any other parts - for example some internal supporting walls, or external features such as dormer walls - then the zero-rate doesn't apply to any of the construction. This also means that the construction wouldn't qualify for a VAT DIY refund. So if you're simply replacing an existing dwelling, then the construction work will probably be liable to 20% VAT. That's a huge difference to your costs.
HMRC enforce these rules very strictly - it is the law so they don't have much lee-way. That's why it's so important that you read and understand how the rules apply in your situation. Small things can make a significant difference. You might like the idea of keeping a wall with some dormer windows, but it's probably significantly cheaper to remove that wall entirely than have to pay VAT 20% because the construction is a "replacement" and not a "new" dwelling.
HMRC enforce the
zero-rate and reduced
rate strictly. It's the
law so they don't have
20 Converting or renovating for lease or sale
If you're building, converting or renovating for lease or sale, you're also eligible for the VAT savings on construction work described in Chapters 7 and 8. The VAT rules for businesses and when businesses can claim VAT are explained briefly in Chapter 18, Appendix 4 and my book "VATWoman's Guide to residential property development".
What if things don't go to plan?
Of course, things don't always go to plan and you might find yourself in a situation where you have to sell or lease your new, newly converted or refurbished property. Chances are that the zero-rate or reduced rate for the construction work won't be affected, but it could affect your entitlement to claim under the DIY refund scheme. I've explained how you deal with VAT if your initial plans fall through and you have to sell or lease the property in Chapters 16 and 17.
VAT invoices
A "VAT invoice" is the legal document issued by the vendor or contractor which confirms that you've bought goods or services. Usually, when you buy goods or services, you receive a "receipt" which shows basic information about the sale, e.g. the date. the retailer's VAT registration number, description of goods or services, the total amount paid and the VAT rate.
However, if the goods or services cost £250 or more (including VAT) the supplier - whether it's a retailer or a contractor - has to give you a full VAT invoice which shows a lot more information, including a full description of the goods and services.
In practice, you only need a full VAT invoice if you're claiming VAT under one of the DIY refund schemes. This is the documentary evidence that allows you to include the VAT on your claim. If you're making a DIY refund claim, it's also important to make sure that your details are shown correctly, i.e. name, address etc or HMRC may reject that part of your claim.
The full list of information that you need on a VAT invoice is shown in the Appendix to this chapter. Other ways of saving VAT: apportioning contractors' fee
In most situations, you'll pay VAT at 0%, 5% or 20% on the full value of construction services, but there are situations when your contractor can apportion certain parts of the bill.
Suppose the contractor is converting the first floor of a property into a flat, where most of his work qualifies for the reduced rate. The ground floor is a shop. At the same time, he also carries out some repairs on the roof and the foundations of the property. Of course, the roof and foundations are essential parts of the property and benefit both the ground floor shop and the first floor conversion.
You only need a full
VAT invoice if you're
claiming VAT under
the DIY refund
21 Normally, the contractor would have to charge VAT at 20% on property repairs. However, because the repairs are being carried out in the course of the conversion, the contractor can apportion this part of the bill so that you only pay 5% VAT on the part that relates to the first floor.
Apportioning costs can be done in different ways and can only be done in certain circumstances. I've included some more detailed information in Appendix 3. It's worth understanding the principles to keep your VAT costs as low as possible.
Chapter 1: Checklist VAT is charged on sales at 20%, 5% or 0%.
The contractor decides which rate of VAT must be charged. Construction of a new dwelling is usually zero-rated.
Certain conversion and renovations are liable to the reduced rate of VAT, but only if the work meets certain strict criteria.
Other construction services are standard rated apart from very limited reliefs for the disabled or the elderly.
The DIY refund scheme allows private individuals who build their own home or convert a dwelling from a non-residential property to claim VAT on certain costs.
You need a proper VAT invoice in your name from your supplier or contractor to claim VAT under the DIY refund scheme.
Contractors can apportion their invoices to identify work at different rates of VAT. If they don't, they have to charge VAT on the whole amount.
22 VAT Invoices
The following is an extract from HMRC VAT Notice 700, The VAT Guide, paragraph 16.3 http://tinyurl.com/p97npe7
Information needed on full VAT invoice:
a sequential number based on one or more series which uniquely identifies the document
the time of the supply (tax point)
the date of issue of the document (where different to the time of supply)
your name, address and VAT registration number - you may issue invoices under a trading name, but your legal name and address details must still be shown somewhere on the document
the name and address of the person (customer) to whom the goods or services have been supplied
a description sufficient to identify the goods or services supplied
for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency
the gross total amount payable, excluding VAT, expressed in any currency
the rate of any cash discount offered
the total amount of VAT chargeable, expressed in sterling
the unit price
the reason for any zero rate or exemption
The final bullet point refers to the following types of supply:
supplies subject to a second-hand margin scheme
supplies subject to the TOMS
intra-EU exempt supplies
intra-EU reverse charge supplies
23 The VAT fractions
Usually, retail prices are shown as VAT inclusive amounts. We call this the "gross selling price." The VAT exclusive selling price is called the "net selling price". Building contractors usually give VAT exclusive prices, which means that they add the VAT rate once you've agreed the price.
However, retailers don't have to show the VAT if the gross value of the sale is £250 or less. The VAT fraction is the VAT proportion of the gross price.
If you're preparing a DIY Refund Scheme claim, some of your invoices will only show gross prices, so you have to calculate the amount of VAT included, by using the VAT fraction as explained below.
Goods or services that are standard rated: 20/120
Suppose you buy a new table for £200. The standard rate of VAT is currently 20%. The gross sales price always includes VAT, so your £200 is made up of 2 parts:
the net (VAT exclusive) sales price which for the purposes of the VAT fraction is 100%; and the VAT amount which is the net sales price multiplied by the VAT rate; in this case 20%.
In percentage terms, this means that the gross selling price is 120% of the net sales price and the VAT included is 20% of the gross selling price. The gross price of the table is £200; i.e. 120% of the net price.
VAT included in the gross price is calculated as 20/120 x £200 = £33.67. Goods or services that are reduced rate: 5/105
If you buy a child's car seat, including VAT at 5%, for £50 gross, then the calculation is as follows: £50 = 100% net price + 5% VAT = 105%.
24 Chapter 2: Definitions
So what exactly IS a conversion then?
I mentioned in the Introduction that certain words have specific definitions according to the context. Two of the most important in this context are "dwelling" and "conversion".
There are at least 3 different definitions of "dwelling" and 2 different definitions of "conversion". The definitions of "dwelling" are explained in detail in HMRC's VAT Notice 708, paragraph 14 http://tinyurl.com/otedchh and the criteria are listed in Appendix 2. While they are similar, there are slightly different criteria for different issues, meaning that the criteria for zero-rating
construction of new dwellings and for reduced-rated renovation and conversion services are slightly different. I've explained each definition of "conversion" or "dwelling" in the relevant chapters in this book so you know which applies to your situation.
Conversions
Reduced rated conversions
DIY claims: "non-residential conversions" In practice
Property developers and conversions And it's not just VAT...
Conversions
In this chapter, I'm focusing on the 2 definitions of the word "conversion". As I mentioned above, one definition applies to reduced rated conversion and renovation services, the other for the DIY home-converters scheme.
There is one specific difference that means that while your conversion may qualify for reduced rated conversion services, your conversion may not qualify for a DIY refund.
As I've explained below, it concerns how the properties were used BEFORE the conversion. Conversions that qualify for 5% contractors services
These include conversions of the following properties:
a property that has never been lived in, such as an office block or a barn
a multiple occupancy building such as a bedsit block
living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice
Extract from VAT Notice 708, s7.3: http://tinyurl.com/po66ewb
Conversions that qualify for the DIY refund scheme
25 The building (or the part being converted) was never "used as a dwelling" before OR has not been
used as such within the 10 years immediately prior to the conversion. It does NOT include buildings that have been "used as a dwelling" such as:
o public houses and shops where any private living accommodation for the landlord, owner, manager or staff is not self-contained - normally because part of the living accommodation, such as the kitchen, is contained within the commercial areas rather than the private areas
o bed-sit accommodation, and
o crofts
The conversion must be a "non-residential conversion" which includes: o a commercial building (such as an office, warehouse, shop)
o an agricultural building (such as a barn), or
o a redundant school or church
into a building which is ‘designed as a dwelling or number of dwellings’.
Extracts from VAT Notice 708, paragraph 5 http://tinyurl.com/mdc8465and VAT431C:
http://tinyurl.com/pt9ec7h
What's the difference in practice?
It's all to do with how the buildings were used before the conversion.
To qualify for reduced rate conversion services, there must be a change in the number of "single household dwellings".
To qualify for the DIY refund scheme and possible zero-rating of sales, the conversion must be a "non-residential conversion" which means that the property must not have been lived in or "used as a dwelling" in the previous 10 years.
The distinction between "single household dwelling" and "used as a dwelling" is the important issue.
A good example would be a pub, which has some private accommodation, e.g. bedrooms and a bathroom, but isn't self-contained. Suppose a manager and his family lived in those rooms before the conversion.
The conversion of all or part of the property into a "single household dwelling" would qualify for reduced rate contractors' services .
However, because the property has been "used as a dwelling" within the prior 10 years means that the new owner can't claim any VAT under the DIY refund scheme.
We'll be looking at these issues in more detail in sections 2 and 3 of the book, but for now it's important that you're aware that the term "conversion" has different criteria for the reduced rate and DIY refund schemes.
Property developers and conversions
N.B. If you're converting a property to sell, then the sale of the freehold or long lease may qualify for
zero-rating under the provisions set out in Notice 708, paragraph 5 http://tinyurl.com/mdc8465.
26 conversion" as explained above. The criteria are similar to those that apply for the purposes of the DIY refund scheme.
If you make zero-rated sales, you can register for VAT and claim VAT on related costs. I've discussed
this in more detail in Chapter 18, which discusses the VAT implications of residential property
development as a business activity. And it's not just VAT...
Finally, a lot of words that are used in the VAT legislation have different definitions for non-VAT purposes. A good example is the word "occupied" for the purposes of the "empty home" rules is probably different to that used for planning purposes.
Just be sure to keep checking this book if you're confused about the definitions for VAT purposes in different circumstances.
Chapter 2: Checklist
It's really important to understand the correct definition of certain words, particularly "dwelling" and "conversion", because the rules use different terms according to the context.
The most important distinction is between a "single household dwelling" and "used as a dwelling".
The criteria to qualify for reduced rate construction services are less onerous than the criteria for the DIY refund scheme.
To qualify for the DIY refund scheme, the conversion must be a "non-residential conversion" which means not used a dwelling in the previous 10 years.
Commercial property developers may also benefit from the reliefs and can register for VAT to claim VAT on costs if their conversion is a "non-residential conversion".
27 Chapter 3
When you can claim VAT from HMRC: Introduction to the DIY refund scheme One of the most common questions about VAT on domestic construction work is how and when homeowners can claim VAT from HMRC, whether it's VAT at 20% on goods or 5% VAT on contractors' services.
As explained in Chapter 1, you can only claim VAT from HMRC in certain very limited circumstances. The DIY refund scheme is for people who build new homes or convert properties into homes for themselves and/or their family live OR to use as holiday homes.
If your development doesn't apply for the DIY refund scheme, any VAT that you pay is part of your overall cost and you need to budget for this from the start. That's why it's important to understand when the zero-rate or reduced rate applies to keep the VAT cost as low as possible. See Chapter 4 and Section 2, Chapters 7 and 8, where I've discussed this in more detail.
What exactly is the DIY refund scheme? Do I have to do the work myself? How do I apply?
o VAT 431NB: New build
o VAT 431C: Conversions What can't I claim?
Personal or family use
What exactly is the DIY refund scheme?
The DIY refund schemes allow self-build developers who either build new homes or create certain new homes from existing properties for personal or family use. The detailed rules and how to make a claim are explained in Chapters 13-17. This chapter contains a brief
introduction to give you the main principles.
The idea behind the scheme is to ensure that private individuals who create their own homes make the same VAT savings as commercial house-builders.
Do I have to do the work myself?
The term "DIY" is a bit of a misnomer - it DOES NOT mean that you have to physically build or convert the property yourself. It normally apples if you own the land on which a new home will be built, or you own a property which will be converted to a new home. You may engage contractors to do some or all of the work or you may do some of the work yourself; buying goods and materials directly from a retailer or other supplier.
Making a claim isn't a difficult process but you have to be very careful to complete the claim form correctly and provide all of the additional documents and information. HMRC receives hundreds of DIY claims each year, so make it easy for the officers to process your claim.
You don't actually
have to build the
house yourself brick
by brick! In this case,
DIY usually means
that you own the land
on which new houses
are built or buildings
28 How do I apply?
VAT431NB: New build
The claim form VAT431NB is for those of you building a new home from scratch. In this case, you can claim VAT on "building materials" (explained in Chapter 9) but not services
You need to check out the guidance on the VAT 431NB form to make sure that you're creating a "new" dwelling so that you qualify for the scheme. You also need to make sure that contractors don't charge VAT when their work (and related goods) qualifies for the zero-rate. You can't claim VAT on services so make sure that your contractor doesn't charge VAT in error.
VAT431C: Conversions
The claim form VAT431C is for those of you who create new dwellings from existing properties and must qualify as a "non-residential conversion", which is normally when. you convert a shop or pub that has not been lived in during the previous 10 years into a house.
If your conversion meets the criteria, you can claim VAT on "building
materials" and most of your contractors' services.
Details of the refund scheme are in Chapters 13-17 so make sure that your conversion meets the criteria to make a claim before you start budgeting.
What can't I claim?
You can't claim VAT on professional fees or the hire of equipment.
Also, remember that you can't claim VAT paid on the purchase of a commercial property for conversion to residential use. The only way to avoid this VAT is to use the VAT1614D procedure explained in Chapter 6 to instruct the vendor to sell the property exempt from VAT.
Finally, remember that HMRC will not refund any VAT that has been charged incorrectly. It's up to you to ensure that your supplier charges the 0% or 5% wherever possible.
You need to understand how the VAT rules apply to contractors' services so that you don't pay the wrong rate of VAT.
Remember: HMRC
will not refund any
VAT that has been
charged incorrectly.
You have to ensure
that your supplier
charges the 0% or 5%
wherever possible.
Make it easy for the
officers to process
your claim by
completing the form
carefully and
providing any
additional documents
29 Chapter 4 explains some of the more practical aspects of ensuring that you don't pay too much VAT to contractors.
When things don't go to plan
Finally, the scheme is for those of you building or converting for personal or family use.
But what happens if your circumstances change and you decide to either sell the property or to lease it?
I've explained the main situations in Chapter 17. Also, Chapter 20 explains how the rules apply for house builders who decide to live in a house originally built for sale.
Chapter 3: Checklist
You can use the DIY refund scheme to claim VAT if you're building a new dwelling or creating a new dwelling from an existing property.
The scheme only applies if you're intending to live in the property or use the property as a personal or family holiday home.
You don't actually have to physically build the property yourself to use the scheme. You have to submit your application on the relevant VAT 431 form within 3 months of
completion of the property.
You may also be allowed to claim even if your circumstances change and you can't live in the property as you'd planned.
30 Chapter 4
Practical issues: conversions and renovations VAT on contractors' services
In Chapters 7 and 8, I'll explain the technical rules about the type of conversions, renovations and the services that qualify for the reduced rate in more detail.
However this chapter is about the more practical aspects, such as dealing with contractors. It also includes a couple of worked examples to show how your overall VAT costs can differ depending on whether your contractor is registered or not registered for VAT.
How do you get the zero-rate or 5% relief? Zero-rated new construction
What sort of conversions and renovations qualify for the reduced rate? What if the contractor refuses to charge 5% unless I have a letter from HMRC? If my contractor has to pay the difference to HMRC, how much does this cost?
But if my contractor can claim back at 20% then only charges 5%, doesn't that mean he is making a profit of the 15% difference?
I've paid 20% on goods and materials for a conversion - how do I claim the difference between the 20% and 5%?
So why not have everything done by non-registered contractors and save VAT that way? Why not just pay in cash to avoid VAT altogether?
Architects, surveyors, project managers...
You can also get the zero-rate or reduced rate for construction services if you're building, converting or renovating a property in order to sell or lease.
How do you get the zero-rate or 5% relief
In Chapter 1, I explained that VAT registered businesses add VAT to their net sales price, adding 20% when the goods or services are at the standard rate.
You get the reduced rate or the zero-rate when VAT registered contractors provide their
construction services. Instead of charging 20% VAT, they can charge the zero-rate or 5% when the work qualifies. The zero-rate and reduced rate apply to the services that they supply as well as any "building materials" they use in the course of their services. I've explained the meaning of "building materials" in Chapter 9.
If the contractor charges the zero-rate or 5% and HMRC believes that the correct rate was 20%, then the contractor has to pay the difference to HMRC. So you can understand why contractors are often nervous about this issue.
31 Can I claim relief if I buy goods direct?
If you buy goods or materials directly from a retailer or other supplier to use in the course of a new construction or conversion or renovation, you will have to pay VAT at 20%. You can only claim VAT if you're eligible to make a DIY refund scheme claim for new dwellings and certain conversions
Otherwise, you can't claim ANY VAT from HMRC. This means that if you are doing construction or conversions that don't
qualify for the DIY refund scheme, or any renovation, you can't claim VAT from HMRC. Zero-rated new construction
The zero-rate applies to most services that are supplied in the "course of construction" of a new dwelling. If you're building your own home and are engaging contractors to do some or all of the work, then most of their services, along with the building materials they use and install in the property, will be zero-rated. See Chapter 7 for more information.
What sort of conversions and renovations qualify for the reduced rate?
The reduced rate applies to certain "qualifying services" that are carried out in the course of
"qualifying conversions" and "qualifying renovations". Anything that doesn't qualify for the reduced rate is liable to VAT at 20%, so make sure that your contractor applies the reduced rate as much as possible.
Certain residential conversions that create new dwellings or change the number of dwellings qualify for the reduced rate. The reduced rate normally applies where there was previously no existing "single household dwelling".
Renovations qualify for the reduced rate if the property has been unoccupied for more than 2 years and certain other criteria are met.
Remember that you can't claim VAT on costs if you're renovating a property or if your conversion doesn't qualify for a DIY HomeConverters Scheme as explained in Chapter 3. You need to keep your VAT costs down by ensuring that your contractors charge the 5% rate wherever possible. In either case, VAT registered contractors can claim VAT at 20% on the cost of goods and materials and charges the client 5% on his services and the goods and materials used in the conversion as explained in Chapter2.
What if the contractor refuses to charge the zero-rate or 5% unless I have a letter from HMRC? In Chapter 5, I've discussed the issue of VAT and building contracts and dealing with VAT issues. Contractors sometimes refuse to charge the zero-rate 5% reduced VAT rate unless the client has written confirmation from HMRC. I'm often asked how to obtain a written ruling in these circumstances.
Remember, you can only
claim VAT on goods or
materials that you have
bought directly if you're
eligible to claim under the
DIY Refund Scheme for
new dwellings and certain
32 Unfortunately, HMRC do not routinely issue written rulings to confirm the VAT liability of
construction work and will not normally reply to queries from customer. As a VAT registered business, the owner must has to assess its’ own VAT liabilities and this means that they have to decide the correct rate of VAT.
Contractors can ask HMRC for a ruling, but what typically happens in these situations is that HMRC will simply refer the contractor to VAT Notice 708. For example, if the contractor tells HMRC that he is converting a shop into a house and asks HMRC if the 5% rate applies, HMRC will normally refer the contractor to VAT Notice 708, section 7, which deals with the VAT liability of conversions.
However it's worth asking because HMRC may give a more detailed reply, especially if the type of work involved is a bit unusual.
Either way, there are a few options for dealing with this situation:
o Refer the contractor to the relevant paragraph of Notice 708 http://tinyurl.com/n6gttof; paragraph 7 about conversions and paragraph 8 about renovations/renovations to make sure that he can see the information clearly
explained by HMRC.
o Ask if the contractor will agree if you get a
letter/email from a VAT consultant giving an opinion about whether the 5% applies. You will have to pay for advice, but it will probably still be significantly less than 20% VAT on the contractor’s fee.
o Deal with the issue in the contract; for example that you will pay the difference if HMRC rules that the 5% rate is wrong, or that you’ll split the difference, or maybe decide to appeal against HMRC’s decision. I've discussed the issue of contracts more in Chapter 5.
At the end of the day, if all else fails and the contractor refuses to charge the 5% rate, as the customer you can shop around and find a contractor who is willing to charge 5%. You may be also be able to contract some of the labour to a self-employed contractor who isn’t registered for VAT. You’re the customer; it’s your decision.
What if the contractor charges 5% but HMRC say it should be 20%? If my contractor has to pay the difference to HMRC, how much does this cost?
If HMRC don't agree with the 5% or zero-rate, it could cost the contractor a significant amount of money.
Let’s look at some figures
Take our contractor and suppose he has a contract that he has costed at £5,000 net of VAT. The difference between VAT at 5% and VAT at 20% is quite significant:
o £5,000 x 5% = £250. o £5,000 x 20% = £1,000
The difference of £750 is a significant amount of money on this size of job.
Your contractor can
charge 5% on services and
goods used in qualifying
conversions and
renovations.
If you buy goods from a
supplier directly, you have
33 Now, let’s suppose that our contractor charges 5% VAT so the total bill is £5,250. HMRC reviews the return and tells the contractor that the job was liable to 20% VAT. The customer refuses to pay the additional £750.
This is where the calculations become a bit confusing. HMRC treat the £5250 as VAT inclusive, so to calculate 20% VAT included, they apply the “VAT fraction” and calculate the VAT as follows:
£5,250 x1/6 = £875.
The contractor paid £250 on his original VAT return, so he has to pay the difference:
£875 – £250 = £625
The £625 comes straight out of the contractor’s pocket and probably means he loses money on the job.
It’s easy to understand why contractors are careful about charging the reduced VAT rate of 5% or zero-rate.
If my contractor can claim back at 20% on his purchases but
then only charges 5%, doesn't that mean he is making a
profit of the 15% difference?
I'm often asked if it's legal for a contractor to claim VAT at 20% on his costs and then charge only 5% or the zero-rate. The simple answer is yes; it's how the VAT system works. Remember that he has actually PAID 20% VAT to the original supplier - by claiming VAT from HMRC, the contractor is simply claiming the VAT he's paid to his suppliers.
Ultimately how the contractor works out his cost is a commercial decision and it's up to you if you accept his quote.
It's normal commercial practice to cost a job based on the VAT exclusive costs. If you're building new houses, you can claim VAT at 20% on costs but your building services are zero-rated. If you're building an extension on an existing home, you can claim 20% on costs but you have to charge 20% on your building services.
I've paid 20% on goods and materials for a conversion or renovation - how do I claim the difference between the 20% and 5%?
YOU CAN'T. As I explained above, you can only VAT if you're eligible for a DIY refund. Otherwise, the VAT is your cost. For example, suppose you're renovating a property that has been empty for over 2 years (see Chapter 8 about
renovations that qualify for the 5%) and you employ a
contractor to install goods that you've bought from a retailer. The contractor can charge 5% for his work, but you'll pay 20% VAT on the goods and you can't claim the difference.
On a £5,000 job where
the contractor has
charged 5% VAT, the
contractor would
have to pay £625
additional VAT to
HMRC if they believe
that he should have
charged 20%.
If you understand
how the rules work
and when the 5% rate
applies, you can make
some very significant
savings, so make sure
you know the rules
before you start
spending money.
34 A property owner who was planning a "qualifying" renovation asked about VAT when she was asking in a well-known high-street retailer of window, conservatories, doors etc and asked about their supply and installation cost. She explained that the project is a "qualifying" renovation and asked for the 5% reduced rate discount. Unfortunately, neither the shop assistant or floor manager knew anything about the 5% rate, although their head office was able to confirm that the reduced rate would apply.
Unfortunately, this is still quite a common scenario, despite the fact that the reduced rate has applied to certain conversions and renovations for over 10 years now. A lot of contractors will only charge the 5% rate if they are satisfied that it’s correct and that they won’t end up having to foot the bill if HMRC disagrees.
That's why it's essential that YOU understand when the reduced rate applies- you can't rely on the retailer to get it right!
The information about the reduced rate is explained in VAT Notice 708: buildings and construction http://tinyurl.com/pv9wvxh. Refer the retailer/contractor to this if they aren’t aware of the 5% rate or don’t agree. Their accountant should be able to confirm the issue for them.
Nowadays, a lot of contracts for such work will list the work that is liable for the reduced rate. I’d also suggest including some provisions in case HMRC dispute the liability at a later date, to ensure that you and the contractor agree how to cover the cost of any undercharged VAT.
If you understand how the rules work and when the 5% rate applies, you can make some very significant savings, so make sure you know the rules before you start spending money. So why not have everything done by non-registered contractors and save VAT that way? Using non-registered contractors is the only way to avoid VAT on labour costs. However it means that you will be paying 20% on all the goods and materials supplied by the contractor. The 20% cost on materials will be built into that quote from the unregistered contractor.
The examples below demonstrate the differences in cost depending on whether the contractor is registered for VAT. In each case, the charge for labour is £1,000 net of VAT. The examples show the difference based on goods that are less than the services, the same cost as the services or much higher than the services: £100, £1,000 and £10,000
Example 1: Cost of goods less than the services. Unregistered contractor:
VAT inclusive goods: £120 Labour: £1,000
Total: £1,120.
Registered contractor: If he is registered for VAT, he can claim the £20 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
35 Labour : £1000
Total net: £1,100 plus VAT @ 5% = £1,155
In this case, using a non-registered contractor can save £35 Example 2: Cost of goods and services are the same. Unregistered contractor:
VAT inclusive goods: £1,200 Labour: £1,000
Total: £2,200
Registered contractor: If he is registered for VAT, he can claim the £200 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
Net cost of goods: £1,000 Labour : £1,000
Total net: £2,000 plus VAT @ 5% = £2,100
In this case, using a registered contractor can save £100.
Example 3: Cost of goods is significantly higher than the labour Unregistered contractor:
VAT inclusive goods: £12,000 Labour: £1,000
Total: £13,000.
Registered contractor: If he is registered for VAT, he can claim the £20 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
Net cost of goods: £10,000 Labour : £1000
Total: £10,000 + £1,000 = £11,000@5% = £11,550.
In this case, the saving from using a registered contractor is proportionately much higher; i.e £1,450 So the potential saving depends on how much of the cost is for materials and how much for labour. In practice, using an unregistered contractor is only cheaper if there's a higher proportion of labour to materials (whether it's bricks and mortar or new windows). I'm sure that there is a mathematical formula that can work out the "tipping point" and quickly calculate when it's more cost effective to
36 use a registered or non-registered contractor, but I'm no mathematician so I always end up doing the calculations using a calculator!
Either way, it might still be less expensive for you; but I'd suggest getting quotes from a number of contractors, including both registered and non-registered and see how the figures work out. Either way, it’s worth spending some time working out the figures to see which is the most cost effective way of engaging contractors.
But remember: VAT is only one issue that you need to consider. Over the years, I've seen many people get very bogged down in trying to save a few £100 VAT by employing the "cheapest" non-registered contractors or messing about asking a labour only
contractor to buy goods at 20% and charge 5%. They may save a bit of money, but it's easy to lose sight of the big picture and end up with a lousy conversion or new dwelling. Don't engage a contractor who isn't registered for VAT just to save a bit of money if your gut is telling you to engage the VAT registered contractor.
Why not just pay in cash to avoid VAT altogether?
If you ask a contractor to do any work for cash to avoid paying VAT, you are asking the contractor to commit fraud by knowingly under-declaring VAT. You would be jeopardizing the
contractor’s business simply to save yourself a bit of cash. Of course, some contractors might agree, but then just ask yourself: if they’re willing to cheat the VAT man, then you have to wonder whether they're also cheating you.
Architects, surveyors, project managers...
And finally, a word for those architects, surveyors and project managers out there. I often get queries from private individuals who are struggling to deal with VAT and find that their architects or surveyors don't understand the VAT rules very well at all. There seems to be a lot of confusion about how VAT works and when it applies to the property developments discussed in this book. Of course, VAT is a complex subject, but if you can get your head around the basic principles, then you'll be better able to identify potential savings for your clients and help them to save money in the long run.
Usually, it's most
cost-effective to use
unregistered
contractors who do
mostly labour only
work, e.g. decorators.
If you buy goods and
materials directly,
you'll pay 20% on the
37 Chapter 4: Checklist
The contractor has to determine whether the work is liable to VAT at 20%, 5% or the zero-rate.
If the contractor doesn't charge enough VAT, HMRC will require the contractor to pay any undercharged VAT.
Contractors can charge the zero-rate for new construction and fthe reduced rate for certain conversions and renovations.
HMRC will not normally give customers rulings about VAT liability on construction work. HMRC will normally only give contractors a ruling if the issue is not covered in their public
guidance.
Private property owners can't claim VAT from HMRC unless their project qualifies for the DIY refund scheme.
In practice, this means that you can't claim VAT unless you are constructing a new dwelling or creating a new dwelling from an existing building.
If you're entitled to make a DIY refund claim, remember HMRC will not refund VAT that has been charged incorrectly by a contractor so make sure that your contractor charges the zero-rate or reduced rate wherever possible.
Using non-registered contractors can save money if the value of services is higher than the value of any goods that they supply.
See VAT Notice 708: Buildings and construction http://tinyurl.com/pjryxe8 explains the rules in detail.
