Where building contractors carry out works which are zero rated or reduced rated for VAT; that has implications for any sub-contractors they engage.
In recent months, HMRC have been identifying a number of building contractors who have claimed VAT charged to them on projects that they have treated as zero rated. Strictly this VAT is not correctly charged; therefore the contractor has no right to recover the VAT as input tax. And this seems to be a growing problem.
Historically, HMRC had taken a relaxed view, and allowed main contractors to recover VAT on invoices from sub-contractors. The works were invariably taxable, so there was no loss of tax. However, as far as I know, this practice was never formally recognised as a concession.
All that has now changed!
HMRC are now applying the rules quite strictly. They generally start by denying input tax relief for the main contractors, or the final customer. They then look at the sub-contractors, where appropriate. In one case, HMRC applied a penalty to a sub-contractor who charged VAT at the standard rated instead of at the zero rate!
There are a number of different scenarios. Main contractors, in particular, must take action to apply the correct VAT rate to the contract. AND, I suggest, they need to notify their sub-contractors of the correct VAT liability. This, of course, may vary between sub-contractors.
Where the project is a ‘relevant residential’ or ‘relevant charitable’ building, then zero rating only applies when services are supplied to the user of the building. All sub-contractors should invoice at the standard rate.
However, where the project is a dwelling, whether a new dwelling or works to a Listed Building, then zero rating applies to services throughout the supply chain. Indeed, zero rating is statutory in this circumstance.
More complicated, of course, is where a project is a mixture of rates. A Listed Building project is likely to be an example. This makes life very complicated for the main contractor, as his sub-contractors must invoice him the correct amount of VAT.