I was involved in a building project some years ago which had four VAT rates: 0%, 5%, 17.5% and 20%. As you can imagine, the VAT calculations were fairly complicated!
But, what if a contractor charges the wrong amount of VAT? What should he do? How does the client claim a refund, especially if he is not VAT registered?
The problem does not arise for commercial properties, since all construction and renovation work is standard rated.
But for domestic dwellings and other ‘qualifying’ buildings, i.e: RRP (relevant residential purpose) and RCP (relevant charitable purpose), the question is important. Since the client is rarely able to recover the VAT charged, any over-charge represents an increased cost.
Using a simple example (can VAT ever be simple!?)
Suppose the project is a residential development, the client a private person. The contractor has charged VAT at 20% instead of the correct 5%. What is the correct process?
The client is entitled to revert to the contractor to correct the error. The contractor also has to refund the client. (Any failure to do so is a civil matter, not a VAT issue.)
The contractor can issue a VAT-only Credit Note, so that he adjusts his VAT Account.
The question is then asked: does the contractor have an obligation to advise HMRC? (I have found HMRC Notice 700/45 unclear on this point.)
My view is that, since a taxpayer would not normally notify HMRC of the issue of a Credit Note to correct an invoice, there is no reason to do so. When the contractor issues the Credit Note and enters it in his records, that is an ordinary accounting adjustment.
If the contractor takes a different view, then the guidance in Notice 700/45 should be followed. The limits at £10,000 and £50,000 would apply. So, either he simply adjusts his VAT Return, or completes a form VAT 652, with a covering note.
There is also a question concerning timing: should the contractor refund the VAT before he has adjusted his VAT Return or until he has received repayment from HMRC? Again, this is not strictly a VAT question. Normally I would recommend the contractor refund the money to the client when the Credit Note is issued. On occasion, I have known the client to agree to delay the refund until HMRC have made the repayment.
