VAT dispute with builder

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Some advice needed please.

Entered into a contract with a local builder (sole trader) in February 2023 for the conversion of a barn into a self-contained living unit (bathroom, bedroom, kitchen area) and a garage / carport. Several years ago, the barn was used in connection with an arborist business, never lived in and since we took over the property in 2020 that has remained the case.

During February and March 2023, the builder and I engaged in discussions regarding the application of the reduced VAT rate of 5%. We both concluded that this rate was applicable, as per HMRC guidance. At no point did the builder express any disagreement or request additional information regarding the revised VAT rate and no certificate was completed.

On May 5th 2023 I received amended invoices from the builder reflecting the updated rate. From that date onward, all subsequent invoices applied the 5% rate (circa 20 additional invoices). Throughout the project's duration, there were no further discussions regarding the VAT rate, and I had assumed the matter closed.

However, relations with the builder started to deteriorate, the project became several months overdue and in early April 2024 I requested the application of liquidated damages (per our contract). Following that request, the builder responding by saying that they believe that the incorrect VAT amount has been charged and submitted an invoice for me to pay based on the rate being 20%. Needless to say, we have reached a stalemate.

I am seeking guidance on two crucial matters:

1. Verification of whether the project legitimately qualifies for the reduced rate of 5% VAT.

2. If the project does not qualify, where does the responsibility lie to remedy? I feel the builder initially agreed to the 5% rate as an incentive to secure my business, which subsequently led to them securing additional projects through my architect. However, it appears that now, with the relationship strained, they are attempting to hold me solely accountable for this arrangement. Would it not be the case that they are accountable to the treasury and have a responsibility not to chop and change the VAT rate?

Many thanks

Replies (11)

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paddle steamer
08th May 2024 16:48

1. Look at the planning, are you creating a dwelling maybe would be a starting point?

2. Look at the contract and what it does or does not say re VAT.

Ideally hire someone versed in construction contract mediation/ evaluation/ settlements- I have a business acquaintance who builds houses and uses our offices on a Friday for his near weekly such meetings, the industry can be litigious.

Note, if a small contract sum (say less than £1m) you may have difficulty hiring a pro who is interested in the work.

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By lesley.barnes
08th May 2024 16:48

You need to engage a VAT specialist for the 1st query, who if necessary could act as an expert witness. Depending on this report you need to engage a solicitor. This is far to complicated to deal with in this forum. There are some VAT experts who post on this forum you may be able to approach to give you a quote.

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By rmillaree
08th May 2024 16:59

surely your contract was worded so that it was on the basis its x + vat - therefore surely you knew if vat treatment was wrong you are the one at risk in that regard?

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Ivor Windybottom
By Ivor Windybottom
08th May 2024 18:19

Just a thought - are you going to make a claim to HMRC to recover the VAT, i.e. making a zero rated first sale of the property?
If so, any overcharged VAT will either get dealt with by HMRC refusing/restricting the claim (and thus your builder will have to repay you the excess 15%) or the VAT gets repaid by HMRC and you can keep your fingers crossed that matters are concluded.
This may be an easier way out?
Obviously still take legal advice, not just some hints from a website forum!

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By Jason Croke
08th May 2024 19:05

I've had similar queries from home owners who have a job at zero or reduced rate and then following a dispute, the builder then argues the whole job should've been 20% and is meant to bully the customer to stop the dispute, pay what's remaining of the original contract and then the threat of VAT at 20% suddenly disappears.

In other words the builder is using VAT as a bat to beat the customer into not pursuing any complaints.

This is a legal matter, you need a lawyer.

I could say the job should be reduced rated but it's the builder you need to convince.

If you are satisfied the job is reduced rated, then stick to your guns, tell the builder they will have to notify HMRC of their error of charging the wrong VAT rate historically, that you want to see the VAT652 that builder has submitted and then when HMRC issue the assessment, then you will pay the prepared to have to pay the VAT but at least the VAT is going to HMRC and not builders pocket.

Remind builder there are also penalties of upto 30% due on this historical VAT, so if builder is using this bully boy tactic, it'll cost him penalties if he follows through on this as you are not liable for the penalties.

That, or try and resolve the dispute and always, always have a written contract (because even if you like the idea of a handshake, cash payments no questions asked, when it goes wrong, you've nothing to play with).

Thanks (5)
By Justin Bryant
09th May 2024 09:30

You should only engage builders etc. who are highly rated on a websites like checkatrade or findmybuilder etc. as they are all terrified of their rating slipping and that is all the leverage you'll need to avoid any kind of argument in the first place.

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Replying to Justin Bryant:
By rmillaree
09th May 2024 10:07

the op hasnt even indicated here that the agreement between the parties was - imho blaming the builder in the absence of any evidence they have done something wrong seems presumptious.

imho the standard here is that if customer thinks they are eligigble for zero/reduced rating - the most common situation is that the builders says we will proceed on that basis (if they and tehir advisor are happy) but ultimately you are liable for whatever correct vat is. imho its very rare to have sketchy vat and builder to go with fixed cash price and be on the hook for vat being differenet. I would love for the builder to post their version of events here to get a balanced picture.

OP if you can evidence that the vat should be 5% thats all you need to do and the builder cant charge you more than that end of. Thats your repsonsibility though to evidence that the work is entitled to be charged at 5% - you copuld ask them for evidence for their stance - if this is not forthcoming then that should say alot !

there is a middle ground here if its not clear what price has ben quoted - but imho it seems reaosnably clear if you the OP wrongly guided down the 5% route ref vat from the start you should expect to pay the correct vat if its more - unless you had evidence that there was a cash price was fixed to include vat - with the vat rate having been discussed sounds like that is anything but the case here.

Hopefully if it is known to be 5% work AND the builder is trying to con you then hopefully they will get short shrift - if that is the case you could advise you will rpert their shady pratices to teh vat office - if its a fact though that the builder has found out the work is 20% vat then its clear 20% vat shoudl apply.

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Replying to rmillaree:
By FactChecker
09th May 2024 15:37

Whilst not a legal necessity (except in certain cases that aren't part of this thread), it has always seemed to me to be sensible (if telling the builder, in advance, that some of the works are subject to reduced rate or even zero-rated VAT) to provide them with a Certificate of your reasoning ... obviously before work starts.

Basically the VAT component/rate is part of the contract - and just as I wouldn't sign such a contract that made me liable for 'whatever quantities of materials are found to be necessary', nor would I if it merely says 'all prices subject to VAT'.

Thanks (2)
Replying to FactChecker:
By rmillaree
09th May 2024 16:06

, it has always seemed to me to be sensible (if telling the builder, in advance, that some of the works are subject to reduced rate or even zero-rated VAT) to provide them with a Certificate of your reasoning ... obviously before work starts.

ideally one wants "reasonable evidence" - even reasonable evidence isnt any form of certainty as often there are so many different ways to fail that it can be hard to have proof positive eg with newbuild it needs to be down to one wall max.

" Basically the VAT component/rate is part of the contract - and just as I wouldn't sign such a contract that made me liable for 'whatever quantities of materials are found to be necessary', nor would I if it merely says 'all prices subject to VAT'."

You may not but if the customer is the one with the full facts and the customer is the one who is driving the lower rate of vat request (the builder is presumably likely neutral here) - imho any builder who doesnt cover themselves in this regard is putting themselves at unecessary risk as they dont have the full facts. Note when you say "certificate" most (but not all) reduced rate/zero wokr isnt certificable and that is where the problem lies - its not so bad where there is a certificate.

The builder does need to risk [***] though - if you are a good customer and you wont fork out extra vat if it turns out to be s rated then choice needs to be made whether you are reliable enough customer to proceed anway. Generally a good accountant would hopefully say i am happy with that or not happy with that practicably speaking - even then perhaps many acountants dont want to put their noose on the line.

its unclear here why it has gone so tragically wrong - its seems slightly dubious that then op is perfectly clean and the builder some charlatan when the op was agreeing with lower vat rate - i am casting judgment here perhaps when i should not through apologies op if that is teh case and builder is complete shyster. Note if its reasonably clear that the builder has "wrongly" implied 5% vat then hopefully the op is in a stronmg position to say they were mislead with vat rate - op do you have any evidence you were mislead here?

Thanks (0)
09th May 2024 11:25

''I feel the builder initially agreed to the 5% rate as an incentive to secure my business''

I am afraid that what you ''feel'' is irrelevant. It is the contractual terms and tax legislation that will provide you with a factual basis to determine your real position and act.

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Replying to JD:
By FactChecker
09th May 2024 15:32

Or, in the excellent words from the Charities Aid Foundation, "Seek advice early: VAT is a transaction tax – it is difficult to mitigate VAT once the transaction has taken place."

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