The most common query I receive about VAT and residential renovations is if/how you, as the property owner, get the 5% reduction for goods and materials.
Unfortunately, you can’t. This is because the 5% ONLY applies to goods and materials that are supplied and installed in the property by your contractor, as explained below.
If you are purchasing goods only, the retailer has to charge 20% VAT. That’s it. And you can’t claim the difference between 20% VAT and 5% VAT from HMRC.
If you purchase the goods from a contractor who also installs the goods in the course of providing reduced rated renovation services, the contractor can charge 5% for the services and the goods.
This is how it works in practice:
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.
You might get a better price for the boiler (bathroom suite, new doors etc) if you shop round. How do you work out whether this is cheaper overall than the supply and fit option?</b>
Unfortunately there’s no simple formula to work this out, because each case is different and depends on a range of factors. You’d have to take into account the size of your discount under Option A and how much mark-up the contractor adds under Option B.
Here’s an example:
Suppose 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.
Because he’s trade, he can get a much higher discount of 25% on the boiler. The cost to him works out as follows:
Discounted net price: £1,500 less 25% discount = £1,125.
VAT at 20%: £225.
VAT inclusive price: £1,350.
However, as the developer is registered for VAT, they can claim the 20% VAT of £225 from HMRC on their VAT return.
What if the contractor gives 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. In practice, 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.
The most important of which is that if you pay 20% VAT for work that qualified for the 5% rate, you can’t claim the VAT, or even the 5% portion of it. This is because the VAT has been incorrectly charged, so the invoice from the contractor isn’t valid and the only way you can sort this out is to ask the contractor to refund the difference.
I know this is a messy issue, but the best was of thinking about it is that you CANNOT save VAT if you buy goods and/or materials alone. You can only benefit from the 5% if the contractor’s services qualify for the 5% and he installs the goods/materials in the course of the 5% construction services.
You can find more information about the 5% rate and when it applies in VAT Notice 708, para 8 https://tinyurl.com/y4ycz2wx and my book “VAT for DIY property developers” which you can buy in pdf format here https://tinyurl.com/y2jofeqd or in paperback from Amazon.