Q:
I have paid some invoices which included VAT relating to materials and labour costs to my builder who is registered with Companies House.
Recently I have been informed by the builder that they are not registered for VAT (I assume they do not need to be registered with HM Revenue & Customs if they are not registered for VAT).
As I have already made some payments to them which included VAT and there is an outstanding balance payable to them, should I be paying the VAT to the builder / company if they are not VAT registered? Do they have the right to charge / show VAT on their invoices?
Due to the circumstances would they be liable to prosecution from HM Revenue & Customs (as they are not collecting the VAT on their behalf) or any other governing bodies for misleading the public. I have already asked the builder why VAT is being charged (awaiting for a response). Do I need to inform HM Revenue & Customs or any other governing bodies of the situation if the mater cannot be resolved?
A:
Bit of a difficult situation for you to find yourself in.
I know from experience that there is a lot of confusion – and yes in some cases VAT fraud – in the construction industry, but very often both builders and their customers don’t fully understand how the VAT rules work and that’s why things don’t look right. It may well be the case that your builder has got his invoicing arrangements wrong but it could be a genuine mistake rather than deliberate.
As you rightly point out, the basic rule is that unless you are registered for VAT, you should not charge VAT on an invoice. It is both a criminal offence and civil offence and in any such situation, the VAT shown is a debt payable to HMRC.
However that may not be what is happening in your situation and that’s what you need to establish. Suppose your builder has purchased goods and services in order to carry out the work at your home. It’s likely that he will have paid VAT on the purchases concerned – certainly if they have purchased goods from any VAT registered builder’s merchants, DIY superstore – and it’s possible that the subcontractor providing the services, perhaps a plumber or decorator, is registered for VAT. That means that the builder will have paid VAT, which of course he can’t recover as he isn’t registered for VAT.
Typically building contracts are based on the builder passing on to the customer the full cost, including any VAT that he can’t recover, of any goods and services that he has to obtain, to carry out the work, in addition to his own charges which are usually based on hourly rates and overheads.
So as an example, let’s say that his own costs are £5,000. He also purchased materials costing £2,000 plus VAT of £350 and subcontracted some work to a plumber for which he’s charged £1,000 plus VAT of £175. His final bill for you is for £8,525 which covers his own charges plus the goods and services he’s bought in and the VAT on those invoices. I don’t see anything wrong in that, as all he’s doing is passing onto you the cost of the irrecoverable VAT on the cost of materials and labour. He might also enclose copies of those invoices to prove to you the amounts that he’s paid out as evidence of his costs.
What he can’t do is to add any VAT onto his own charges nor should he be showing a VAT registration number on his own invoice. So if he was charging VAT on top of his own costs of £5,000 without being registered then that would be wrong.
I can’t tell for certain without seeing your contract and I can’t cover every scenario here, but this is what might be happening. If you want some further information about this subject, have a look at the guidance given for consumers on the HMRC website here http://tinyurl.com/354pxp3 and you might also want to have a look at the guidance given to businesses about VAT invoices here http://tinyurl.com/y2bt2j.
If you aren’t satisfied with the builder’s explanation about VAT, you can notify HMRC by contacting the VAT helpline – details are given on the consumer information pages mentioned above. I don’t think that you are legally required to notify HMRC, it’s up to you. But either way, you can give the information anonymously and HMRC will follow it up. I don’t know about whether or not you are required to notify any other authorities as I can only comment on the VAT side of things, you might find some information on the Citizens Advice Bureau website.
Hope this helps you sort things out.
Marie