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Should we have paid invoices directly?

Paying for invoices directly for our building contract

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We hired a builder for a £70k project, whom is VAT registered.

We discussed paying for as much directly as possible to avoid paying additional VAT to our builder, and now the project has come to an end our builder is trying to deduct the £18k paid by us from the Gross amount and not the Net, meaning there was absolutely no benefit in us paying all of these invoices directly. 

 

Is this a common stitch up contractors try on?  I don't know if we have rights to argue it when it was a verbal agreement, but it just wouldn't make sense for us to have paid everything directly otherwise.  We have even paid £4k of his workers wages (via transfer)

Replies (56)

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By Paul Crowley
26th Nov 2021 20:27

To whom were the invoices that you paid made out?

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Replying to Paul Crowley:
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By TamaraJane
26th Nov 2021 20:34

Things like skips were ordered by the builder but i set up an account with my details for the payments.

For the other materials he ordered and just sent me copies of the invoices, i think mostly in my name. Does that make a difference?

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Replying to TamaraJane:
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By Matrix
26th Nov 2021 20:46

How does all this save VAT?

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Replying to Matrix:
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By TamaraJane
26th Nov 2021 20:57

Our discussion with the contractor initially was that if we paid for materials it would be taken off the price, therefore we wouldn't be paying additional VAT to the contractor

Eg. 5k bill + VAT = 6k
5k bill - 1k materials paid by us, £4k + vat = £4.8 + £1k = £5.8k

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Replying to TamaraJane:
Jason Croke
By Jason Croke
26th Nov 2021 21:00

But the materials you buy yourself would still have VAT in them unless you are somehow buying materials from a builders merchant that isn't VAT registered.

The only gain is the builder cannot add a profit margin in the materials he buys (ie, he buys a sink from B&Q for £50 incl VAT, adds 10% margin and charges you £55 plus VAT, so buying direct saved you a couple quid VAT than had builder supplied it himself.

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Replying to TamaraJane:
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By Paul Crowley
26th Nov 2021 21:03

Does not work like that
you pay £1200 inc VAT to save him £1000

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By Matrix
27th Nov 2021 07:44

But there was VAT on the materials so you still had to pay the missing £0.2k.

If he buys them then he gets back that £0.2k so doesn’t charge you VAT on VAT so the cost would have been the same surely?

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Replying to TamaraJane:
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By Paul Crowley
26th Nov 2021 21:00

If you pay invoices in his name then you are just effectively paying him up front.
In what way did you think there was a vat saving?
Even if you had invoices in your name you paid the VAT
for example
£100 plus VAT
You pay £120
He saves £100 net so deducts £100 net off the net
That is the same as knocking £120 off the gross

I think there is no issue
The total payable is the same

How did you come to the conclusion that there was a VAT saving?

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By David Ex
26th Nov 2021 20:43

You should have consulted an accountant for your tax planning and a solicitor for your contract. Unfortunately, you’re now reaping the consequences of doing neither.

Get yourself an accountant to unpick what has actually happened.

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Jason Croke
By Jason Croke
26th Nov 2021 20:57

£70k contract on only a verbal agreement? That is a massive risk, always get a full written quote from anybody, be it a builder or accountant.

There's no advantage in you buying the materials yourself as you'd be charged 20% VAT by the builders merchant.

What is common is the builder will let you use his account number to get a discount from the merchant but it's still plus VAT from the merchant or the other version is builder orders the materials at cost and recharges to you at cost, but would still be plus VAT.

Why are you paying his sub contractors? Makes no sense either for VAT or contractually/legally.

I think perhaps you've misunderstood the situation, there is no VAT savings if you are paying the builder, you have to pay the suppliers directly yourself to get s VAT saving in only some situations, else the builder has to treat your payments as part payment towards the agreed quote.

The £18k already paid is part payment not the total project which dill be the quoted price plus VAT.

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Replying to Jason Croke:
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By TamaraJane
26th Nov 2021 20:59

We did have a written contract, but that we would pay for materials directly agreed verbally.

Our discussion with the contractor initially was that if we paid for materials it would be taken off the price, therefore we wouldn't be paying additional VAT to the contractor for him purchasing the materials

Eg. 5k bill + VAT = 6k
5k bill - 1k materials paid by us, £4k + vat = £4.8 + £1k = £5.8k

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Replying to TamaraJane:
Jason Croke
By Jason Croke
26th Nov 2021 21:36

That example only works if you buy the materials with invoices in your name, if the goods are in his name, he must charge you VAT, there is no VAT saving for you.

If you'd gone and got your own materials from your own suppliers, then his quote would be lower as less materials he has to buy himself and that is where the saving is.

It's not a scam, both you and the builder haven't quite understood how VAT works and what was needed to achieve the VAT saving.

If you've paid his suppliers direct, they are still his suppliers, all you've done is paid them so he has a cashflow benefit. He can't now just pretend those supplies were direct to you if the invoices are in his name.

Don't look at VAT as numbers, this is contract law, the suppliers supply him, who pays the suppliers is irrelevant, he owns the goods as invoices in his name, he has to charge you VAT when he then supplies those materials to you (in the form of building things with the materials).

I get what you are saying, you want the net cost reduced by what you've already paid him, but to avoid VAT, the quote should only have been labour only or labour only plus some materials he bought direct himself

As to why you are paying sub contractors, that sounds proper dodgy, as that is avoiding CIS as well as VAT. The subbies are either contracted to work for you or him, not both. Sounds like all you've done is helped his cashflow as you've been paying his subbies and materials costs upfront.

I'd get a lawyer not an accountant.

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Replying to Jason Croke:
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By TamaraJane
26th Nov 2021 21:53

Oh gosh :( a right balls up!

The invoices were all in my name and sent to my email. Does that help?

He knew from the beginning we wanted to reduce VAT payment to him on the overall costing, not to avoid paying any VAT on materials of course - these have all included VAT.

Now the job has finished he's taking all these materials off the gross not the Net which has made us absolutely no difference, and indeed only helped his cash flow

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Replying to TamaraJane:
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By David Ex
26th Nov 2021 22:45

TamaraJane wrote:

He knew from the beginning we wanted to reduce VAT payment to him on the overall costing, not to avoid paying any VAT on materials of course - these have all included VAT.

If you take tax advice from a builder, I’m afraid you take a big risk.

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Replying to TamaraJane:
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By Tax Dragon
27th Nov 2021 02:59

TamaraJane wrote:

Oh gosh :( a right balls up!

Well, not really. You undertook a £70k (either including VAT or plus VAT, I'm not sure which) project, and you'll've paid £70k (either including VAT or plus VAT, I'm not sure which) for it. System works. And you're bang on budget. (If only government could do so well! Their projects always seem to come in at cost x 5 or more.)

TamaraJane wrote:

He knew from the beginning we wanted to reduce VAT payment to him on the overall costing, not to avoid paying any VAT on materials of course - these have all included VAT.

And so you will. You've paid some of the VAT already when you paid for the materials, so you'll pay less VAT to the builder. Same VAT overall, obviously, but so it should be. System works. And you're bang on budget.

TamaraJane wrote:

Now the job has finished he's taking all these materials off the gross not the Net which has made us absolutely no difference...

Made no difference? Proves he's right to do it that way then. System works.

But at least you're bang on budget.

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Replying to TamaraJane:
RLI
By lionofludesch
26th Nov 2021 23:23

TamaraJane wrote:

We did have a written contract . ....

Did it say who was supplying what to whom?

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Replying to lionofludesch:
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By TamaraJane
27th Nov 2021 07:53

Nope.. I trusted him as he had done a friends job, so thought he would go by what we had discussed

Very silly of me

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By Paul Crowley
26th Nov 2021 21:07

We all know the rules, but Jason is the accredited expert
I think you misunderstood the gross net thing in your conversation

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RLI
By lionofludesch
27th Nov 2021 07:35

So now the job's done, who will you sue if anything goes wrong?

You have contracts with the builder, his subcontractors and his suppliers. Which one is at fault?

You could've had one contract with the builder.

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Replying to lionofludesch:
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By Tax Dragon
27th Nov 2021 08:02

Wrong forum, liono.

Sounded to me like there's an invoice from the builder per the quote (70k including, or maybe plus, VAT - I'm not sure which) less £18k already paid. IANAL, but it's not obvious anything's changed. Except cashflow. (And I'm a bit lost on CIS... maybe OP paid the subbie [on behalf of the builder] and builder paid the taxman? Or is there another way it could have worked?)

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By NotAnAccountant2
27th Nov 2021 09:10

Many builders add VAT onto the VAT which is why there's a saving paying directly.

I had exactly the same when I had my kitchen redone. The calculations went:

I buy materials: 6k (comprising 5k+VAT)
They do work: 3k (comprising 2.5k + VAT)

Total: 9K

or

They buy materials 6K plus do work 2.5K Plus VAT

Total: 10.2K (The 5K of materials having VAT added twice)

I don't know if it's that builders don't understand VAT, or they're hoping that people will be "I'm not doing VAT fraud" and so pay the higher bill and the builder then pockets the VAT refund later but it happens.

I can understand where the builders are under the VAT threshold but not when they're also adding VAT.

(In my case it was even more weird because either way I had to pay the 6K for the materials up front - either to the builder or to the kitchen company)

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Replying to NotAnAccountant2:
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By Leywood
27th Nov 2021 09:29

They are not adding vat on vat, they are adding a margin. Just so happens it’s a 20% margin. Why should they not add a margin?

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Replying to NotAnAccountant2:
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By TamaraJane
27th Nov 2021 13:24

Finally someone gets it! And this is what was agreed, so that we paid the materials upfront and then had to pay the builder less. Not tax evading, just saving us money

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Replying to TamaraJane:
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By Paul Crowley
27th Nov 2021 15:53

You are replying to "not an accountant"
The honest builder charges net and adds the VAT at the end
If you pay gross of VAT to the supplier you save him £1,000 net
But you pay £1,200 including VAT for him to deduct £1,000 net
You pay builder £200 less VAT on his invoice because to paid the £200 yourself to the supplier

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By Leywood
27th Nov 2021 09:39

Would be an interesting court case trying to explain why you were trying to avoid tax.
:) :)

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Replying to Leywood:
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By TamaraJane
27th Nov 2021 13:25

Its not tax evasion its just working it out so we don't pay more VAT than needed

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Replying to TamaraJane:
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By Leywood
27th Nov 2021 13:34

Did I say tax avasion? No I did not!

I said tax avoidance.

You said tax avoidance.

You clearly do not get it.

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Replying to Leywood:
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By TamaraJane
27th Nov 2021 13:43

OK, I'm just asking for advice.
Not having a go

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Replying to TamaraJane:
RLI
By lionofludesch
27th Nov 2021 13:53

TamaraJane wrote:

OK, I'm just asking for advice.
Not having a go

There's not much advice to give.

You agreed a contract and then sought to change it. From what you say, your builder is quite entitled to his full £70,000, with no deduction for what you've paid other folk.

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RLI
By lionofludesch
27th Nov 2021 13:16

Are all those subcontractors VAT registered ?

There may be a few quid in there........

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Replying to lionofludesch:
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By TamaraJane
27th Nov 2021 13:26

Most definitely not VAT registered, but the builDer will no doubt go down the same route saying we just agreed a price with VAT and you owe me that whole price regardless of what we've already paid.

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Replying to TamaraJane:
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By lionofludesch
27th Nov 2021 13:36

TamaraJane wrote:

Most definitely not VAT registered, but the builDer will no doubt go down the same route saying we just agreed a price with VAT and you owe me that whole price regardless of what we've already paid.

If that's true, how were you ever going to save VAT ? Tax evasion or just ending up paying less.

Having said that, I don't think I'd want to spend £70k on a project and have separate contracts with half a dozen or more tradesmen.

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Replying to lionofludesch:
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By TamaraJane
27th Nov 2021 13:50

Say it was a £10k job.

£4k materials and £6k labour.
Builder pays for materials and does labour, invoice to me is £10k + VAT which comes to £12k

If I pay for materials that is £4k
Builder charges £6k labour + VAT which comes to 7.2k + 4k / £11.2k

Thats a saving of £800 on a £10k project

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Replying to TamaraJane:
RLI
By lionofludesch
27th Nov 2021 14:12

TamaraJane wrote:

Say it was a £10k job.

£4k materials and £6k labour.
Builder pays for materials and does labour, invoice to me is £10k + VAT which comes to £12k

If I pay for materials that is £4k
Builder charges £6k labour + VAT which comes to 7.2k + 4k / £11.2k

Thats a saving of £800 on a £10k project

Mmmm - but the builder would've paid £4,800 for those materials and claimed £800 back. You would pay £4,800 and get nothing back.

No saving at all.

If, on the other hand, we substituted the words "unregistered subcontractors" for "materials", you'd have a point.

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Replying to lionofludesch:
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By Paul Crowley
27th Nov 2021 15:59

But OP would need to engage the subcontractors, not the builder
In principle yes, but only on the subcontractors.
But if subcontractors messed up, no option of expecting Builder to fix the issue

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Replying to lionofludesch:
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By TamaraJane
27th Nov 2021 13:26

Most definitely not VAT registered, but the builDer will no doubt go down the same route saying we just agreed a price with VAT and you owe me that whole price regardless of what we've already paid.

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Replying to TamaraJane:
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By Paul Crowley
27th Nov 2021 22:26

Not really
Builder was not taking any markup on either materials or subcontractors
You have demonstrated that he is rock solid honest
He deducted from his total everything you paid

I think your chat was instigated by you and you wrongly thought there was some point in paying the bills that he would have paid
Builder in his quote took account of the VAT he could reclaim and was only taking the net cost to the net total
Based on all comments
You have a rock solid honest builder

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Replying to Paul Crowley:
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By Tax Dragon
28th Nov 2021 02:52

Paul you pretty much answered the question in the very first reply. In order to change the tax position, OP needed to change the legal position.

To start with, there was a contract under which builder would do some work (including providing materials etc) for 70k. OP then kindly suggested, in effect, making payments on account, but it doesn't sound like the underlying contract was changed. It doesn't sound as if OP negotiated a different contract (for less work and a lower fee) with the builder and additional contracts with other suppliers of labour and/or materials.

No change to the underlying legal position; no change to the tax.

But, frankly, trying to change the underlying legal position would probably have been crazy anyway. (Liono's point: who would you sue?) Imagine taking your car for a service and negotiating separate contracts with the garage and its mechanics. Or trying to reduce the VAT on your accountant's fees by saying you'd pay staff directly.

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By Truthsayer
28th Nov 2021 09:41

You have clearly not understood anything we have told you, as you just keep repeating the same fallacious point. Based on the facts you have told us, the short version is that your builder is right. Just pay him.

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DougScott
By Dougscott
28th Nov 2021 13:14

Tamara

It's a bit hard to understand the exact circumstances here and obviously not having a contract setting these things out is a problem. I would guess that your £70,000 contract breaks down something like this from the builders perspective (remember the builder recovers VAT on material costs):

Materials (net cost) £20,000
Labour £40,000
Profit margin £10,000
Total contract price = £70,000 + VAT = £84,000.

Let us imagine you have paid all the materials costs directly then that would have cost you £24,000 as you can not recover the VAT (unlike the builder).

If the builder is being fair then he should charge you £50,000 + VAT = £60,000. He still gets his £10,000 profit margin (as he should because he has still done the same amount of work). You have paid £24,000. Same total figure. There is no saving by you paying directly.

Clearly there has been a misunderstanding somewhere. Perhaps you expected the builder to reduce his profit margin proportionately as well but why would he do that for the same job?

Where you are using professionals such as architects/project managers they often base their fees on a percentage of the final build costs/contract price (which to me is a disincentive for them to keep contract costs down) - so if you did some of the contract yourself and that reduced the contract price you could make some savings there but often it's just not worth the candle.

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the sea otter
By memyself-eye
28th Nov 2021 13:58

did he do a good job?

just asking....

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Replying to memyself-eye:
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By Paul Crowley
28th Nov 2021 14:22

Brilliant

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Replying to memyself-eye:
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By TamaraJane
28th Nov 2021 14:38

Ha ha ha hah!!! No!
That's why he's now being difficult with the money he wants.
We had to remove a whole section of works as it didn't pass Building Control as it wasn't done properly.
So he's now being sour

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Replying to TamaraJane:
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By Hugo Fair
28th Nov 2021 17:07

In which case you've been asking the wrong question all along (and of the wrong people).
It sounds like you're not really trying to quibble over the pre-work financial agreement (or indeed change it after the event) ... you believe that you shouldn't have to pay the full (agreed) price because builder has failed to deliver the (agreed) work - at least to an acceptable standard.

That is a very different 'discussion' (which would have been easier to achieve if you had employed some sort of project manager - whether architect, quantity surveyor, buildings control inspector or whatever - whilst work was in progress).

What you now have is a commercial/contract dispute about which no-one on this site can usefully comment, because it isn't an accounting issue.
Talk to the builder or appoint someone with relevant legal expertise to do so on your behalf.

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Replying to Hugo Fair:
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By Tax Dragon
28th Nov 2021 17:15

I'm sure it's not just me thinking it is probably just as well the underlying legal position wasn't mucked around with.

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Replying to Tax Dragon:
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By Hugo Fair
28th Nov 2021 17:39

With apologies to lion's copyright ... [chuckle]

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Replying to Hugo Fair:
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By TamaraJane
28th Nov 2021 18:45

Thanks. That isn't the issue as this section has now been removed from the contract

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Replying to TamaraJane:
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By Hugo Fair
28th Nov 2021 18:55

Glad to hear it - as it means at least some 'negotiation' has already taken place.
But presumably that has coloured all subsequent conversations between you and the builder and any remaining relationship is strained?
Your specific question has been responded to in many ways but with a consistent conclusion ... which you are of course free to ignore.
My point remains however that what you now have is, if anything, a contractual dispute not an accounting error.

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Replying to TamaraJane:
RLI
By lionofludesch
28th Nov 2021 19:03

TamaraJane wrote:

Thanks. That isn't the issue as this section has now been removed from the contract

So what does it say now?

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Replying to Hugo Fair:
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By Paul Crowley
28th Nov 2021 22:51

Concur
OP did not refer to a dispute other than indicating a misunderstanding of VAT

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