Share this content

Reduced rate on construction supplier invoices?

How do you convince a builders merchant to reduce rate their invoices to a developer.

Didn't find your answer?

Our client has a property development/construction company.

This year they took on a barn conversion site, rather than the new build sites they normally work with.  They didn't realise that the construction supplies they were buying should have been reduced rate.  One VAT enquiry later, they have been made to pay back all the overclaimed input VAT to HMRC.

The problem I now have is the builders merchants and other suppliers are refusing to reduce rate their supply - As they cannot guarantee what site the materials are used on.  I understand their point of view, but it has left our client paying 20% VAT to the supplier and only able to reclaim 5%.  And HMRC is £37k better off.

Has anyone come accross this issue?  There are DIY homebuilder schemes but they do not apply to developers.

Replies (12)

Please login or register to join the discussion.

chips_at_mattersey
By Les Howard
21st Dec 2020 13:38

Supplies of materials cannot be reduced rated.
The reduced rate only applies to supplies of services which can include the incorporation of those goods into the building.

If HMRC have ruled that the supply of goods should have been reduced rated, and disallowed input tax accordingly, you should urgently appeal.

Thanks (4)
Replying to leshoward:
avatar
By kitarna
21st Dec 2020 13:51

Thank you!
I shall go back to the compliance officer and appeal the decision.
I even queried this at the time but the only reply I got was:
"The supplies being provided falls under the Reduced Rated Schedule 7A, and the appropriate VAT should be claimed, this is regardless of what it shows on the invoice. Input tax is recoverable according to the VAT chargeable on the supply, this does not mean charged. There are VAT tribunal cases which support this and an ECJ case, please see Genius Holding BV 1001 STC 239 for more details."
I was not confident enough to challenge it further at the time.

Thanks (0)
Replying to kitarna:
Jason Croke
By Jason Croke
21st Dec 2020 14:08

kitarna wrote:

Thank you!
I shall go back to the compliance officer and appeal the decision.
I even queried this at the time but the only reply I got was:
"The supplies being provided falls under the Reduced Rated Schedule 7A, and the appropriate VAT should be claimed, this is regardless of what it shows on the invoice. Input tax is recoverable according to the VAT chargeable on the supply, this does not mean charged. There are VAT tribunal cases which support this and an ECJ case, please see Genius Holding BV 1001 STC 239 for more details."
I was not confident enough to challenge it further at the time.


..."appropriate VAT should be reclaimed regardless of what it shows on the invoice"....HMRC actually put that in a letter? Shocking.

You can only reclaim what the invoice shows, it would be chaos if you could just make up your own rules and reclaim what you think is right, regardless of what the invoice says. If the wrong rate of VAT has been applied, the only correct route is to have the invoice reissued with the correct rate of VAT and then reclaim it.

Reference to Sch 7A is certainly in relation to installation of energy saving materials rather than conversion. So if HMRC are saying you can only reclaim 5% of the building merchants invoice for goods only, then you have a HMRC numpty on your hands.

Thanks (1)
Replying to Jason Croke:
avatar
By frankfx
21st Dec 2020 14:25

Jason Croke wrote:

kitarna wrote:

Thank you!
I shall go back to the compliance officer and appeal the decision.
I even queried this at the time but the only reply I got was:
"The supplies being provided falls under the Reduced Rated Schedule 7A, and the appropriate VAT should be claimed, this is regardless of what it shows on the invoice. Input tax is recoverable according to the VAT chargeable on the supply, this does not mean charged. There are VAT tribunal cases which support this and an ECJ case, please see Genius Holding BV 1001 STC 239 for more details."
I was not confident enough to challenge it further at the time.

..."appropriate VAT should be reclaimed regardless of what it shows on the invoice"....HMRC actually put that in a letter? Shocking.

You can only reclaim what the invoice shows, it would be chaos if you could just make up your own rules and reclaim what you think is right, regardless of what the invoice says. If the wrong rate of VAT has been applied, the only correct route is to have the invoice reissued with the correct rate of VAT and then reclaim it.

Reference to Sch 7A is certainly in relation to installation of energy saving materials rather than conversion. So if HMRC are saying you can only reclaim 5% of the building merchants invoice for goods only, then you have a HMRC numpty on your hands.

Input vat.
Reality check on claims

https://vatexchange.co.uk/management-services/you-can-only-claim-vat-tha...

"If VAT is charged

incorrectly

on an invoice,
then the invoice is

not a valid VAT invoice

and the customer cannot use the invoice to claim VAT"

Discuss.

Thank you

Thanks (0)
Jason Croke
By Jason Croke
21st Dec 2020 14:01

As Les has already posted, supplies of goods from a builders merchants will always be standard rated, so I doubt you will convince the builders merchants to reduced rate their supplies.

Installation (labour) could be reduced rated by the contractors/other builders and also reduced rated where the contractor is supplying both materials and their labour together. Reduced rated would apply for a barn conversion.

If you are saying HMRC have forced your client to pay back VAT, if the purchase invoices are genuinely just for goods on their own, then HMRC are likely wrong and you should appeal (as Les has stated).

Are you sure these purchase invoices are just for goods? Are these purchase invoices actually for supply and install (ie, plumber supplies the sinks, taps and installs them), if so, these invoices should usually be reduced rated and HMRC may be saying the plumber has charged 20% when it should be 5% as the job is conversion. If so, then HMC are right to deny the VAT refund as you can only reclaim VAT if it has been correctly charged by the supplier.

If the labour/install contractors are refusing to reissue invoices, then you need a dialogue with them, show them HMRC's letter perhaps or refer to HMRC Notice 708, section 7.

Thanks (2)
Jason Croke
By Jason Croke
21st Dec 2020 14:12

The reference to Genius Holdings is here https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit63100

Which refers to the wrong rate of VAT charged on an invoice, is not recoverable as input tax.

Thanks (0)
avatar
By frankfx
21st Dec 2020 14:18

https://vatexchange.co.uk/management-services/5-vat-rate-residential-ren...

The above has some examples.

When appealing please suggest that the VAT officer is offered retraining.

How many other decisions have been on the wrong side of law.

What internal checklist did officer misuse to reach the conclusion?

Is the checklist fit for purpose?

What, no checklist?

At first sight this appears to be fundamental misunderstanding of the reduced rate scheme.

VAT.... so simple, not!

Seek recovery of costs.

Finally please kindly keep us informed.

Thank you for sharing.

Thanks (1)
Psycho
By Wilson Philips
21st Dec 2020 14:35

All of this just reinforces my view that neither the VAT Helpline nor the Compliance Officers have the foggiest idea about the tax that they are supposed to be dealing with. I have clients that have had a very simliar experience to that of the OP. I had to take one to Review stage and the Review Officer's opinion of the VAT Compliance Officer's approach was interesting to say the least.

Thanks (2)
RLI
By lionofludesch
21st Dec 2020 15:15

I agree with everybody.

Only builders can reduce rate construction services.

If materials could be reduced rated, the door would be open for fraud.

I'm appalled.

Thanks (0)
Replying to lionofludesch:
Psycho
By Wilson Philips
21st Dec 2020 15:25

lionofludesch wrote:

I'm appalled.


But presumably not surprised.

I know that I'm starting to sound like Justin, whining on about the same topic, but the 'C' part of HMRC is simply not fit for purpose. At least when C&E was a separate department there was a semblance of understanding of VAT and how it worked.

Thanks (0)
Replying to Wilson Philips:
RLI
By lionofludesch
21st Dec 2020 16:13

Wilson Philips wrote:

lionofludesch wrote:

I'm appalled.

But presumably not surprised.

No.

But that's a shocker.

Thanks (0)
avatar
By kitarna
22nd Dec 2020 11:47

Update*
I have contacted the compliance officer - they have allowed me to appeal the assessment.
As long as I do all the work to find out what invoices they have disallowed at standard rate, then send them a complete list along with copies of invoices to prove goods only.
So a lot more work, especially at this time of year - but at least I will be able to get the client some money back.

Thanks (0)
Share this content