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.