Building contractors’ VAT adjustments

VAT adjustments

November 30, 2020

Certain businesses have different VAT rates to take into account which demands more carefulness compared to those having a single VAT applicable. Building projects can have various VAT rates leading to complicated VAT calculations. As a result of different rates being applicable there are chances of a mistake.

Commercial properties are not a problem here as all the work be it construction or renovation is standard rated. But, for residential properties where we may have different VATs charged, we need to be careful. Apart from domestic dwellings there are a few buildings qualified for lesser VAT like the ones for charitable purpose.

What if wrong VAT rate is charged?

Imagine Mr Roberts is planning to buy a residence. He is a layman not much aware about the VATs and so when he is charged 20% VAT by his project developer, he could not question the same. Later he finds out he was supposed to be charged 5%. What does he do?

Usually whatever VAT is charged, you try to reclaim as input VAT. This is possible only when you are VAT registered. But sometime that won’t be possible as in above. What should such clients who are affected due to the mistake of the contractor do?

Can they get refund? Yes they can. Such clients can approach the contractor and ask him to correct the error. The contractor can issue a VAT-only credit note and adjust his VAT account.

What about the contractor?

Does the contractor have to report to HMRC about the error? Well! There is no clarification on the same in HMRC Notice 700/45. However, it seems fine. Issuing a credit note to correct an error is an ordinary adjustment and need not be reported.

What if the contractor doesn’t want to issue the credit note?

The contractor must refund the money and make the error correction as per the rules to adjust the amount on his VAT Return. If he doesn’t refund his client it is a civil matter and not a VAT issue.

If the contractor doesn’t want to issue the credit note and take some other measure then he needs to abide by the error correction rules. If the error is above £1000 VAT or above £ 50000 Net then he needs to submit form 652 and not just adjust on his VAT return.

When should the contractor refund his client?

Should the contractor refund the VAT before he has adjusted his VAT Return? Should he wait until he has received repayment from HMRC? Or should he pay right away?

Ideally, the contractor should refund the money to the client when the Credit Note is issued. There is no need to wait to get the refund himself. After all it was he who had over charged. However, the client too may agree to wait for the refund if requested until HMRC have made the repayment.