The most common misunderstanding about VAT and renovations is when you can get the 5% reduced rate. So I thought that I’d try to clear up the confusion.
The basic rule is:
- If you are purchasing goods only, the retailer has to charge 20% VAT. That’s it. And no, you can’t claim the difference between 20% VAT and 5% VAT from HMRC.
- If you purchase the goods from a contractor who <u>also installs the goods</u>, he can charge 5% for the services and the goods.
The reason for this is that under the VAT law, the 5% rate only applies to services supplied in the course of qualifying renovations or restorations AND GOODS SUPPLIED IN CONNECTION WITH THOSE SERVICES
Option A If you buy a boiler from a builders merchant and install it yourself or engage a plumber to install it, you have to pay 20% VAT on the boiler.
Option B If you have a VAT registered plumber/contractor under a “supply and install” arrangement, then the services and the boiler and other materials used are eligible for the 5% rate.
I can get a better price for the boiler (bathroom suite, new doors etc) if I shop round. How do I work out whether this works out cheaper overall than the supply and fit option?
Unfortunately there’s no simple formula to work this out, because each case is different and depends on a range of factors, including the size of your discount under Option A and how much mark-up the contractor adds under Option B.
Here’s an example:
I want to buy a boiler that has a list price of £1,500 net of VAT. I find a retailer who agrees to give me a 15% discount, so the VAT inclusive cost works out as follows:
- Discounted net price: £1,275.
- VAT at 20%: £255
- VAT inclusive price: £1,530.
- The cost of installation by a trader who is not registered for VAT is £800.
Total price: £1,530 + £800 = £2,330.
I engage a VAT registered contractor to supply and install the boiler.
Cost of boiler
Because he’s trade, he can get a much higher discount of 25% on the boiler. The cost to him of the boiler works out as follows:
- Discounted net price: £1,500 less 25% discount = £1,125.
- VAT at 20%: £225.
VAT inclusive price: £1,350.
However, because he is registered for VAT, he can claim the 20% VAT of £225 from HMRC on his VAT return.
Cost of boiler plus labour
Assume that I persuade the contractor to give me the same 15% discount that I would have got if I’d bought direct?
- The net price would be £1,275.
- Plus his labour: £800
- Total net cost: £1,275 + £800 = £2,075
- Plus VAT @ 5% = £103.75
Total price: £1,275 + £800 + £103.75 = £2,178.75.
In this case, it would be cheaper to engage the contractor under Option B:
Option B price: £2,178.75
Option A price: £2,330
I’d save £151.25 over the price if I bought directly and engaged labour directly.
Of course, this example only considers one relatively small piece of expenditure and the answer would be quite different if, for example, the contractor charged me list price for the boiler. But there can be significant savings by engaging a single contractor to do the whole renovation at 5% VAT. If you were looking at a total spend in excess of £150,000, the saving from a supply and install contract could be several £1,000s.
Finally, I’m often asked if it matters whether you pay 20% rather than 5% if you can claim the VAT back from HMRC. In practice, this won’t apply to most of you who are doing renovations – unless you’re one of the rare number of DIY claimants who are eligible to claim VAT on costs under the DIY converters claim scheme that applies to renovations where the property has been empty for 10 years or more. In that case, the answer is YES, it is important to pay the correct amount of VAT. The main reason is simply that if you pay 20% VAT for work that qualified for the 5% rate, you cannot claim the VAT, or even the 5% portion of it. The reason for this is that the VAT has been incorrectly charged, so the invoice from the contractor isn’t valid and therefore you can’t use it to claim VAT. In this case, you’d have to ask the contractor to cancel the original invoice and issue a new one showing the correct 5% rate.