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:
Option A
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.
Option B
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.
Marie
September 2020
Marie ive bought your book VAT guide for property developers earlier this week. well worth it.
One point i think i get but would appreciate a view on my scenario. Ive bought some old farm buildings with my wife as private developers , to convert to a single private residence to sell in the open market .Planning permission granted. They’ve only been used as agricultural buildings. My son has a company and is setting up VAT registration for the first time and will do most of the building work and supply materials and subcontractor services eg roofing.. On most of his work (outputs) he will charge 5%, ive downloaded an HMRC form to provide him a certificate though my wife and i aren’t forming a development company, just private owners.So i see him charging 5% on say £150,000 of invoiced work and subcontracted work and of that he may have £100000 of inputs from materials and services with VAT invoices charging 20%, So as the project progresses i believe he can recover circa £16,666 but only pay HMRC 5% on his invoices so thats £7500.. Have we grasped the VAT accounting right for that scenario?
HI Mike, thanks for buying the book and for your very detailed query. Unfortunately I can’t answer that sort of query on the website – the issues are too complicated and I’d end up writing a 3 or 4 page treatise! However if you send your query by email to marie@vatexchange.co.uk, then we can arrange a free 15 minute telephone discussion to cover the subject in a bit more detail.
Hi Mike, sort of correct but like all of these things, depends on the exact detail and I can only comment on a couple of main issues here. It is not unusual for a contractor to claim 20% VAT on goods and services and end up charging only 5% VAT to the customer. A couple of things that I’m a bit confused about – first of all you keep saying that “my wife and i aren’t forming a development company, just private owners.” but if you’re selling the finished property, then for VAT puruposes, you’re regarded as a business; regardless of the “entity”. In your case, sounds like a partnership. The other main thing is that your son can only claim 20% VAT on services if it has been correctly charged, but also that any sub-contract work will probably be covered by the new VAT reverse charge for sub-contractors services. Check out HMRC guidance https://tinyurl.com/j997sn2b.