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Input VAT - Construction

My client is a VAT registered property development company. They use one main contractor for their developments, a limited company which is also VAT registered.

They are currently running 2 projects. Project A is a new build and the sales are zero-rated; I understand that input VAT on qualifying building materials is reclaimable. Project B is a conversion of a public house into residential units. I am negotiating with the revenue what proportion of the new units is exempt / zero-rated in order to establish a suitable apportionment ration for recovery of input VAT on qualifying building materials.

My question is this. Things weren't complicated enough so my client has had the bright idea of purchasing building materials for both projects directly and passing them to the contractor to use for contracted works. However in practice this has not worked out as planned. Instead the contractor has been purchasing the materials and claiming back the gross amount from my client via 'expenses' with no added VAT component. He then passes the invoices to my client in order that they can reclaim the input VAT. I have advised them that this is not workable but need clarification. The way I see it, either the contractor reclaims the VAT and recharges my client net of VAT (plus 5% where appropriate) or my client pays the invoices directly and reclaims the VAT directly.

Any advice would be gratefully received.

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31st Jul 2012 09:17

Construction

If the client has purchased the materials directly, then the contractor cannot reclaim the VAT as input tax - the 'supply' is not being made to him. The client can claim the VAT, subject to partial exemption if the converted units are let (rather than sold).

It would be much more VAT-efficient for the contractor to purchase all materials, as you suggest.

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31st Jul 2012 09:37

Thanks for your help.

But if the contractor is physically purchasing the materials and my client is reimbursing him, can the client claim back the input VAT on invoices which the contractor has paid? (assuming the contractor does not). Also, should the contractor be charging 5% VAT on the reimbursements?

 

 

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31st Jul 2012 14:48

As I see it the contractor can't be claiming expenses and ignore VAT.

I would arrange it just as you describe, the contractor would need to be charging VAT at the applicable rate on his invoices and I would not have the client claiming back VAT on invoices that are not his.

A concern would be that the contractor would be claiming the VAT even if he says he is not, you have no real way of knowing and may inadvertently claim twice even with the best intentions.

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By pawncob
31st Jul 2012 21:59

It's an expensive mistake.

Get a contractor that knows what he's doing.

He should be purchasing the materials and absorbing the costs in his contracted price, which would be zero rated or lower rated depending on the job.

If he purchases and recharges the materials he'll have to standard rate them.

 

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