Q:
When a subcontractor adds a VAT inclusive bill as part of an invoice and then charges VAT on the whole invoice can I reclaim not only the VAT on the total invoice but also the VAT charged on the original bill?
Mike
A:
Hi Mike
You can only recover the VAT on the original invoice if the VAT on it is your input tax. In your case, I suspect that it isn’t your input tax and I’ve explained why below.
I assume that the original bill was issued to the subcontractor and was for materials or expenses that he incurred in the course of providing his services to you. In this case, the VAT wouldn’t be your input tax so you can’t claim it. However it’s possible that the subcontractor has overcharged you by including the gross value of the original bill on the final invoice instead of the net amount in error.
It’s normal for contracts to state that if the subcontractor is registered for VAT (as is yours) then he can only charge you the VAT exclusive value of any such expenditure that he incurs. This is because he can claim the VAT on his purchases or expenses as input tax on his VAT return.
What sometimes happens is that subcontractors charge the gross amount of their bills in error even if they’ve already claimed the VAT on their VAT returns. In this situation, the VAT on the original bill is still not your input tax and you can’t claim it on your VAT return. But under the terms of the contract, you could ask the subcontractor to reduce the net amount of his invoice by the VAT on the bill as he has claimed this as input tax on his VAT return.
Suppose the subcontractor’s final invoice is for £1,000 plus VAT of £150 (based on the current VAT rate of 15%). The £1,000 includes £770 for the subcontractor’s labour plus materials/goods that cost £230. The £230 is VAT inclusive and includes £200 for the goods and £30 VAT.
Under normal contractual arrangements, this means that he should charge you the net amount of £200 for the goods as he’s been able to claim the £30 VAT as input tax. So his final invoice to you would include £770 for labour plus £200 for materials, ie £970 plus VAT of £145.50.
So you need to check out the terms of your contract to see whether the subcontractor is entitled to charge you the net or gross amount of his invoices. You might need to ask your solicitor for advice if the situation is still unclear.
Finally, I mentioned that you could only claim VAT on the original bill if the VAT was your input tax. This would only apply if you purchased the goods/materials and the invoice is issued to you and not the subcontactor. For example, you may have asked the subcontractor to purchase goods on your behalf on condition that you would re-imburse him the cost when he issues his final bill. If that is the case here and the £230 original bill was issued to you, then the £30 is your input tax and you can claim it back under the normal rules.
Not a simple yes or no answer but I hope it clarifies the VAT position and helps you sort it out.
Marie