VAT and Project Manager Fees

[WDF]

Hello experts! A question on project management and VAT. I am 90% through a new build house and have engaged a project manager as I am working abroad. We initially were looking at a Design and build contract with a main contractor overseen by our project manager. On the PM’s advice we understood we would not be liable to VAT on her fees.

 

Having received tenders from a number of builders we went with a JCT prime cost plus contract. 12 months into the 18 month project our PM announces that because we had moved from a Design and Build contract to a cost plus then she had to charge VAT on all her fees.

 

Is this correct? Why can you zero rate VAT for PM fees on a design and build contract and not on a cost plus contract.

 

Any advice would be most welcome.

 

Thanks

WDF

[PeterW]

Hi and welcome

 

Your PM was wrong on both counts ..! The only way you wouldn't pay VAT on the PM fees would have been if you had used a D&B contractor and they had employed the PM. At that point it's all wrapped up as a delivery cost of the build. 

 

If you've got a separate PM who isn't via the main contractor then you're liable for VAT on the invoices and that can't be reclaimed ... sorry ..!  

[Ferdinand]

8 hours ago, WDF said:

Hello experts! A question on project management and VAT. I am 90% through a new build house and have engaged a project manager as I am working abroad. We initially were looking at a Design and build contract with a main contractor overseen by our project manager. On the PM’s advice we understood we would not be liable to VAT on her fees.

 

Having received tenders from a number of builders we went with a JCT prime cost plus contract. 12 months into the 18 month project our PM announces that because we had moved from a Design and Build contract to a cost plus then she had to charge VAT on all her fees.

 

Is this correct? Why can you zero rate VAT for PM fees on a design and build contract and not on a cost plus contract.

 

Any advice would be most welcome.

 

Thanks

WDF

 

Welcome to the forum.

[WDF]

Thank you Peter and Ferdinand.

 

Peter, just a follow up question, does the type of contract matter. In principle could my builder have contracted the Project Manager even on a cost plus contract.

 

Many thanks

WDF

[PeterW]

7 minutes ago, WDF said:

Thank you Peter and Ferdinand.

 

Peter, just a follow up question, does the type of contract matter. In principle could my builder have contracted the Project Manager even on a cost plus contract.

 

Many thanks

WDF

 

Yes - it depends if the service is incidental to the build or part of it. D&B contracts include all services so you are isolated from the VAT issue. The self build VAT guidance note covers where standard rate should be charged and where it can be zero rated. 

[jack]

Welcome to Buildhub

 

If your builder had engaged and paid the PM, then those services could have been zero-rated. The difficulty then, though, would be that your contract wouldn't have been with the PM. Even if the PM were ostensibly working on your behalf, you'd only have had recourse to the builder if the PM's performance fell short.

[WDF]

The JCT contract is between me and the builder. Should I get the PM to issue a credit note for the work she has done and get her to put an invoice into the builder, if I can get all parties to agree.

[PeterW]

It becomes irrelevant as the contract is between you and the PM to manage the builder and the JCT. If you include the PM in scope of the JCT then you have little control over the PM as @jack says. 

 

And you say this has been going on for 12 months - has the PM only just invoiced you ..? If they had to unpick 12 months of invoices it would be problematic on their side for VAT.  

[WDF]

They have been invoicing us without VAT until April and have stalled since then. They now want to put a correction in with HMRC. The build is all but finished so I don't necessarily need control over the PM any more. All is good with the PM and the builder and all parties are very happy. Its just a balls up with the VAT and the inexperience of the PM on VAT issues. If PM issues a credit note for the invoices presented to date and then invoices the builder instead (with VAT) he could pay her invoices. I could write a hold harmless letter to the builder freeing them of any liability for her work.

 

Once again, thanks for your expertise and time on this.

 

WDF

[PeterW]

I don't think that approach will work as the builder cannot reclaim the VAT and not pass it on to you as it's not a D&B contract, it's a JCT contract and they are different. 

 

I think you will just end up swallowing the VAT but I would be asking the PM to discount the final invoices as it's their cock up ... 

[Temp]

+1.

 

Have a close look at the wording of the PM's quote.  I had a few quotes that were for the right amount (eg no VAT had been included) but they were printed on a standard template letter that stated "inc VAT at 20%".  

 

 

[Jeremy Harris]

Welcome, and I'm afraid I can only agree with what others have said.  There are some additional points worth noting though. 

 

Firstly, the concept of a "hold harmless" agreement has little or no legal standing in the UK.  It's primarily a US construct, and one that I have used there, but even then it has only limited influence on the outcome of any subsequent dispute.  Under the law of England and Wales at best it is treated as an indication of intent, at worst it's seen as an attempt to impose an unfair contract term.

 

In this case, timing is everything.  At the point where you contracted with the project manager, be that verbal or in writing, you did not contract for the supply of goods and services, nor did you contract for the supply of a service that could be zero rated for VAT.  The contract came into force after three things had happened; you were made an offer to provide the service by the PM, you accepted that offer, and there was the exchange of a consideration (in this case payment is irrelevant - the work done by the PM is a consideration, in law, so the contract came into force as soon as he did work on the project, or on the date the contract was agreed).

 

All work done by the PM under this contract must, by law, by charged at the normal 20% VAT rate, assuming the PM is VAT registered.  There is no legal way to "undo" work done like this under a pre-existing contract in order to avoid payment of the VAT.

 

What you could choose to do, to reduce the VAT liability for the contract from now on (but not retrospectively), is to terminate the existing contract with the PM, and pay him his fee, including the VAT due, to date.  You could then ask your main contractor if he could sub-contract the PM, as the site manager, under your JCT contract, via a contract amendment, and any work done by the PM from that point onwards could be zero rated for VAT.  The downside has been pointed out already; you lose direct control of the PM, as he now works for the main contractor.

 

As a useful reminder to others, as this is an issue that crops up frequently, all work on a new build that is not directly a part of the construction process is generally liable for VAT at the normal rate.  This includes tool hire, plant hire, skip hire, surveyors fees, project managers fees etc, plus a few others.  There are many pitfalls when it comes to what is and is not zero rated for VAT on a new build, and it is useful to try and identify as many as these as you can before you start, as there are ways of avoiding some of them.  The most common way of avoiding VAT on a service that would ordinarily attract it on a new build is to include it within a part of a larger supply and install/erect/build contract.  For example, having skip hire, or portaloo hire, included in a contract from a builder means it can be zero rated; hiring skips or a portaloo yourself means that it cannot, and VAT is payable at 20%.

Edited September 12, 2017 by JSHarris

[WDF]

Thank you JSH that is very useful.

WDF