The dreaded zero rating for VAT

[L1zzy]

Hi everyone - need your help and advice again. I have just received a long awaited 'estimate to demolish a 2 room lean to at the rear to my listed cottage and rebuild as one room on the same footprint - I have LBC consent and PP. (in fact i
I have had this twice - long story won't bore you all) my budget is as usual tight and the fixed price has come in as £18,760 excl VAT ...and theres the rub - I'm assuming since the builder has put on the quote excl VAT he means to charge me VAT (have asked the architect to check in case I'm being dim) but this will be an additional £3283 and I'm cross!!! What is your guidance - surely the work qualifies for zero rating ? Any guidance on how to arrange myself to go into battle what can I quote etc etc. This is a good builder and I do want to try to use him but he is already playing safe by asking that the funds be put up in advance at the start rather than in installments through the build (i'm happy to do this as he will be working to a fixed price and I know hes doing it because he has been badly burned in the past by people not paying up at the end) - the architect and I are therefore willing but to then find i may have to pay VAT as well as lose 2-3 months interest on my 20k hard save funds is too much - you can probably tell I'm a very unhappy bunny!! so any help or guidance is as usual appreciated.

Happy Christmas all

 

[Jon Maine]

Approved alteration, which a new extension would be should be zero rated, see section 9 in vat note 708

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&id=HMCE_CL_000513&propertyType=document#P896_85591

Perhaps your builder does not deal with vat law often and just quotes everything with vat until pointed out different to him, not many people seem to fully understand vat including some of the vat officers I have dealt with.

Sounds like you just need a chat to him and he should be fine with it I would have thought.

 

[Stephen]

In a nutshell zero rate for VAT is for alterations for which LBC has been obtained. It sounds as if much of the work may qualify. However, 'alterations' as defined by HMC&E is not necessarily the same as the definition for LBC or as most normal people would define it. I do not have time to go into detail now.

It is up to the builder to aero rate it and discuss with his VAT office either now or when he has his next inspection. You should provide him with all the info and copies of LBC, etc so that he has the proof for them.

If the builder does not understand or does not wish to do this - find someone else unless their cost is higher and more than the VAT saving.

It should be your architect advising you on this!! However, ultimately it is the builder's responsibility to pay the VAT over and therefore deal with HMC&E.

On the matter of payment up front - NO. Agree to make a stage payment as soon as materials first arrive on site and/or his men do a days work. You can agree to pay every x weeks a fixed figure and could even set up some form of regular payment for the relevant period. However, I would NEVER advise paying in advance.

You could agree to having a stakeholder (e.g. the architect) who would only release monies when payment is agreed, but at least the builder has assurance the money is there and waiting provided he does the job properly.

Stephen

 

[Flyfisher]

Although alterations works will be VAT-free there is, I believe, no mechanism available to claim back any VAT paid. It is therefore vital to discuss the VAT issue with your builders beforehand to ensure they will not add VAT to their invoices. They don't lose anything by not charging VAT but they will be keen to satisfy themselves that they won't have any liability in case of a VAT audit.

In the case of some electrical works we had done, the electrician had never heard of such things but checked with his accountant who confirmed that the job should be zero-rated for VAT and only required a copy of the LBC for their records. He was quite happy.

The essential message is to agree things before work starts.

I also agree totally with Stephen about not paying anything up front. Only ever pay for completed works done or materials delivered so that if the builders don't turn up one day you are not out of pocket. I've never found any tradesmen who wanted up-front payments. Stage payments are fair enough on large projects, but never advance payments.

 

[middi]

As to payment "up front" I agree with Stephen, I completely disagree with builders asking for any moneys before they do any work, regardless as to how good they are I think it is unprofessional.

Agreements and guarantees to obtain money at certain stages of work in progress is very acceptable.

 

[FamilyWiggs]

Agree - would never pay up front. All the risk then lays with you:

a) you have no leverage to get them to get a move on;
b) you have no leverage in case they do not complete to the required standard;
c) you have no money if they go bust/do a runner.

In this economic climate, it is more likely the reason he is asking for payment in advance is because of c) than any previous bad clients he's had.

Any reputable tradesman should be able to manage their cashflow on a job with staged payments.

 

[Feltwell]

Staged payments leaves your builder with little risk - usually 10% is kept back for the final, post completion payment.

You can agree as many stages with the builder as you & he like, so his exposure to risk is limited to the last stage only - if you don't pay, he doesn't move onto the next stage. It's perfectly normal, but do get it in writing from him, and agree how much each stage is worth. You just choose clear points in the build - foundations complete, floor slab in, brickwork complete, roof on, first fix plumbing and electrics complete, etc. I'd say that is better than agreeing to pay so much per week - pay based on actual progress made than just on time alone.

I personally wouldn't disagree with a 10 - 20% "first day on site" payment either, at the very start of the job - but I wouldn't pay a deposit before he shows up.

Don't forget that he shouldn't be paying for materials straight away, if he's credit worthy he would usually have accounts at the local merchants and pay either 30 days from invoice or 30 days EOM (end of month - so between 30 and 60 days credit, depending on when in the month goods are taken). So if he's making reasnoble progress you will be paying him before he has to pay for the materials for each stage. Labour of course is a different matter, depends on how he pays his workers.

 

[Jon Maine]

Zero rating should not be the issue, convincing the builder to do so is another, we in the building trade have to pay it back should the vat man ask us later so it tends to be easier if at all grey to just say plus vat.

Read the Vat note posted and talk to the builder in a constructive manner and you should be fine.

 

[L1zzy]

Thankyou to everyone - you have set my mind at rest and especially over the monies up front issue - thx again have a happy christmas and fab new year.

 

[Penners]

L1zzy - just one footnote:

Do make sure that the builder is, in fact, registered for VAT. It's not unknown for the occasional tradesmen to add VAT even though they're not registered, and to quietly pocket the "tax" themselves.

Otherwise, I agree with everything said above. Your architect should be advising you on what is or is not VATable in your project. And he should ensure that the builder is provided with the necessary documentation to ensure that you are not charged VAT (where appropriate).

I also agree with Flyfisher's warning - do make sure you get this all tied up before the work starts. Once you've paid the VAT, it's not reclaimable.