VAT and main contractors - barn conversion

[CH1]

I think I’m about to ask a stupid question but I’m going to ask it anyway.  It’s about the 5% rate of VAT on a barn conversion, the rate which applies to our build.

 

Looking at ways of saving cash.  Likely to have a main contractor.  Let’s take for example roof panels as the product - a big cost.

 

If I buy the product and main contractor installs I can claim back 15% VAT afterwards on the roof panel VAT.  And the main contractor charges me 5% VAT on the installation cost.

 

If main contractor buys and installs the roof panels he charges me 5% VAT for doing that as it’s a barn conversion - supply and fit.  But will he have to pay 20% on the roof panels when buying the product, the cost of which he has then no doubt passed on to me? Or can the main contractor purchase building materials with 5% VAT applied from his suppliers?

 

In other words for the ‘big ticket’ items is it worth me paying for the product, assuming I can manage the cash flow, and assuming he agrees. 

[andyscotland]

The main contractor will pay 20% VAT on the materials, but assuming he is VAT registered he will then reclaim that 20% from the government.

 

He will then charge you 5% VAT, which he will pay on to the government.

 

(This isn't a special process BTW, it's the same thing that happens if buying and selling at 20%. In practice once a quarter he will be adding up all the VAT on purchases and sales and just paying/reclaiming the difference).

 

Therefore overall it won't make a difference to the main contractor's figures. However he may be out of pocket for a short period. That will depend on when you pay him, when he has to pay the supplier, and how those two dates fit with the timing of his quarterly VAT returns.

 

If the main contractor is not VAT registered (fairly unlikely unless a tiny firm) then he won't charge you VAT at all. However he will have paid 20% VAT on the materials, which neither he nor you will be able to reclaim - so in that case you would definitely be better getting them yourself.

Edited August 17, 2019 by andyscotland
Added if not vat registered

[ragg987]

The main contractor is likely to want to mark-up the materials, in which case you will, ultimately, lose out. Of course cash flow may still improve.

[CH1]

Thanks to both of you, that's definitely helped me understand!

[andyscotland]

41 minutes ago, ragg987 said:

The main contractor is likely to want to mark-up the materials, in which case you will, ultimately, lose out. Of course cash flow may still improve.

 

Good point.

 

Although I would have thought ultimately the main contractor would be pricing on the basis they'd want to cover their overheads and make a reasonable profit on the job as a whole? So if they don't get to mark up the materials they'd perhaps just uplift the labour rates instead?

 

Other factor of course is a main contractor might be able to get better pricing from suppliers - that might cover some / all of their own markup. Conversely they might just go to their normal merchant and you might be able to do better (at significant time cost) by shopping around for each item.

[newhome]

3 hours ago, CH1 said:

If I buy the product and main contractor installs I can claim back 15% VAT afterwards on the roof panel VAT.  And the main contractor charges me 5% VAT on the installation cost.

 

Why do you think you can claim back 15% VAT on materials purchased yourself? Either your barn is eligible for the reclaim scheme and you can claim back the full 20% VAT you pay on eligible materials or your barn is not eligible for the reclaim scheme and you can't reclaim anything on materials purchased yourself. 

 

Similarly with labour costs charged @ 5%. If your barn is eligible you can reclaim the 5%. If it's not then you can't reclaim the 5%. And the same with 'supply and fit' also charged @ 5%. 

 

Assuming your barn is eligible for the reclaim scheme it may be better to source materials yourself but often builders can get better prices even if they mark materials up a little so best to compare your quote with theirs. They may also charge you more for the labour to recover anything they perceive as being lost if they don't supply materials. Having supply and fit may also help with cashflow as you won't be able to reclaim any of the VAT until the build is finished. If you need to borrow money towards the end to cover the VAT you've paid out but haven't yet been able to reclaim the cost of borrowing may outweigh anything you may save by sourcing materials yourself. 

 

[newhome]

3 minutes ago, andyscotland said:

 

Good point.

 

Although I would have thought ultimately the main contractor would be pricing on the basis they'd want to cover their overheads and make a reasonable profit on the job as a whole? So if they don't get to mark up the materials they'd perhaps just uplift the labour rates instead?

 

Other factor of course is a main contractor might be able to get better pricing from suppliers - that might cover some / all of their own markup. Conversely they might just go to their normal merchant and you might be able to do better (at significant time cost) by shopping around for each item.

 

We just posted pretty much the same thing 

 

[andyscotland]

53 minutes ago, newhome said:

 

We just posted pretty much the same thing 

 

 

Whoops!

 

And I'd not been aware of the actual vat treatment on conversions, just went with the OP on that.

 

Just had a look now, seems weird that they still end up VAT free but the contractor has to charge at 5% for you to reclaim, rather than the 0% new-build rate... I guess there'll be some esoteric reason that makes sense to HMRC.

[nod]

There seems to be a lot of confusion over vat and mark up on materials 

Andy explains it pretty well 

 

I answered a post a couple days back stating as a commercial Plastering and tiling contractor I invoice the company’s for labour and materials 

Someone rightly pointed out that I am charging vat on my mark up on materials 

I answered that I don’t make anything on the materials 

I suspect your main contractor will get the materials for your roof slightly cheaper than you and that should be his markup 

So you shouldn’t be paying any extra

Its all about cash flow 

 

HMRC will get the same amount weather you pay or your contractor 

 

[CH1]

10 hours ago, newhome said:

 

Why do you think you can claim back 15% VAT on materials purchased yourself? Either your barn is eligible for the reclaim scheme and you can claim back the full 20% VAT you pay on eligible materials or your barn is not eligible for the reclaim scheme and you can't reclaim anything on materials purchased yourself. 

 

Similarly with labour costs charged @ 5%. If your barn is eligible you can reclaim the 5%. If it's not then you can't reclaim the 5%. And the same with 'supply and fit' also charged @ 5%. 

 

 

 

10 hours ago, newhome said:

 

Because a barn conversion attracts 5% VAT so I'm assuming that when I reclaim the VAT on products purchased myself HMRC will apply the 5% and refund me 15%.  If it was a new build I'd fill in a different form and they'd refund me 20%.  Going back to my hypothetic example - if the  main contractor charges me 5% VAT for supply and fit of the roofing materials then there is nothing to claim back, VAT was properly applied at 5%.  I think that's the situation, but if anyone has done the process on a conversion do put me right if I've got this wrong!

Edited August 18, 2019 by CH1

[newhome]

3 hours ago, CH1 said:

 

Because a barn conversion attracts 5% VAT so I'm assuming that when I reclaim the VAT on products purchased myself HMRC will apply the 5% and refund me 15%.  If it was a new build I'd fill in a different form and they'd refund me 20%.  Going back to my hypothetic example - if the  main contractor charges me 5% VAT for supply and fit of the roofing materials then there is nothing to claim back, VAT was properly applied at 5%.  I think that's the situation, but if anyone has done the process on a conversion do put me right if I've got this wrong!

 

So the first thing you need to determine is whether your conversion is eligible for the reclaim scheme or not. The details are here:

 

VAT431C

 

If you are NOT eligible then you can't reclaim anything at all, and any VAT on materials you purchase has to be paid at 20%, and VAT on labour and supply and fit is at 5%. 

 

If you ARE eligible then you can reclaim the full 20% VAT on eligible materials AND the 5% paid put on labour or supply & fit arrangements. So it puts you in the same position as for a new build. 

 

So to your original question you CAN claim back the 5% if your conversion is eligible. 

 

There is a guide to the VAT reclaim process in a sub forum and you will be able to see it once you have made a few more posts and become a 'regular' member. It mostly covers new builds but the majority of the rules apply to eligible conversions too. 

 

Guide to the VAT reclaim process

 

[newhome]

13 hours ago, andyscotland said:

Just had a look now, seems weird that they still end up VAT free but the contractor has to charge at 5% for you to reclaim, rather than the 0% new-build rate... I guess there'll be some esoteric reason that makes sense to HMRC.

 

It's because not all conversions are eligible for zero rating. Properties being converted that have been empty for 2+ years are eligible for the 5% VAT rate, but if the property has been empty for 10+ years it is eligible for zero rating à la the new build scheme. I imagine it would be quite challenging for a VAT registered trader to be certain whether a property met the 10+ years criteria so all conversions are charged at 5% and the balance repaid via the VAT reclaim scheme. I imagine that's the reason anyway! 

 

[CH1]

Incredibly helpful thank you.  That's completely altered how I'd (incorrectly) understood VAT and barn conversions.  I thought 5% was payable and that part was never refundable.  But now I see I can claim for not just the eligible products I buy myself at 20% but all invoices for supply and fit at 5%. We're probably going main contractor route as never done this before, not enough experience nor time to do the build ourselves, so presumably he will charge 5% on all invoices and I then claim that back after the conversion is done.  Although cash flow will be stretched, that's some extra wonga I thought I'd never see again - result! 

[andyscotland]

1 hour ago, newhome said:

 

It's because not all conversions are eligible for zero rating. Properties being converted that have been empty for 2+ years are eligible for the 5% VAT rate, but if the property has been empty for 10+ years it is eligible for zero rating à la the new build scheme. I imagine it would be quite challenging for a VAT registered trader to be certain whether a property met the 10+ years criteria so all conversions are charged at 5% and the balance repaid via the VAT reclaim scheme. I imagine that's the reason anyway! 

 

 

Ahh that makes sense. 

[newhome]

2 hours ago, CH1 said:

Incredibly helpful thank you.  That's completely altered how I'd (incorrectly) understood VAT and barn conversions.  I thought 5% was payable and that part was never refundable.  But now I see I can claim for not just the eligible products I buy myself at 20% but all invoices for supply and fit at 5%. We're probably going main contractor route as never done this before, not enough experience nor time to do the build ourselves, so presumably he will charge 5% on all invoices and I then claim that back after the conversion is done.  Although cash flow will be stretched, that's some extra wonga I thought I'd never see again - result! 

 

Always good to find out that you are due tax back rather than constantly paying it out . Just ensure that you are charged the correct amount of VAT as HMRC will never refund VAT that has been incorrectly charged. There are certain things that you can't claim for (details on the claim form and also in the 'guide' link I posted above that will be visible to you when you reach 10 posts). The 5% rate should cover work closely connected to the construction of the building too, so drives, boundary fences, levelling the ground, soft landscaping (turf but only plants and trees included in a landscaping scheme on the Planning Permission), connection of services. Those are a few examples anyway. Lots more details in the link I posted. And if you end up using a non VAT registered trader at any stage ensure that you supply the materials so that you can recover the VAT as otherwise you will have to pay full VAT on materials supplied by the trader as he can't charge 5% VAT rate if he is not VAT registered. 

 

[Temp]

+1 Our planners wanted us to plant 60m of hedge and 5 trees. Got the vat back.