Builder just gone over the VAT threshold!

[MsSampson]

Argh, so our builder, who is due to start work on an extension and loft conversion for us in May has just gone over the VAT threshold for the current tax year, so our quote will now have to include VAT. We actually postponed the project because he didn't want to start it in the same tax year for this reason, so it's pretty frustrating, but just one of those things I guess. However, it's a pretty sizeable hike up in price. We did have contingency, but I would prefer to keep some of this in case something crops up during the build itself.

Anyway, my question is - now he will be VAT registered, my understanding is that he won't pay VAT on materials, is this correct? And if so, is it reasonable for ask him to adjust his quote accordingly - ie. the materials part of the cost should be 20% cheaper? And also, we had a lot of items as client supply, but he was going to use his trade accounts to get them for us (although we were going to pay). Would it also be reasonable for us to ask him to add them to the overall quote so we don't have to pay VAT? It will go a good way towards off-setting the big increase we are looking at, so I'm hoping he goes for it!

I'm probably missing something, but the tax year ends on 5th April and a new tax year starts on 6th April. If your build is in May surely it falls into a new tax year?

Re. the vat on materials, I think he will pay vat but if he is a vat registered company he will then be able to claim the vat back. Sounds reasonable to ask him what you've suggested to me - he can say no, but I guess he risks losing your business.

You can choose when to start a tax year, most use a different one than government's.

Tradesmen, companies etc pay VAT on purchases or rather the difference in VAT between goods/services bought & sold.

hi snowgirl - I think it works based on your turnover for the previous year - so if you go over the threshold in Apr 15- Mar 16, then you have to start charging VAT the following year. It's very unlikely we'll find another builder who won't charge VAT who comes as highly recommended as this one, plus it's taken us 6 bloody months to get this far (he quoted within weeks of the tender going out, everyone else took forever), so the thought of trying to find someone else makes me want to cry.

VAT liability is calculated on a rolling 12 months previous income, so it doesn't matter when his business tax year is.

Vat registration goes from the last 12 months from now. Its nothing to do with the tax year.

He will pay vat on materials but every 3 months he will submit a vat return and the vat bill will be minus the vat on materials he has bought.

You are entitled to the materials used without vat but he will have more account costs now he is vat registered and he will then be worse off if you demand the materials without the vat.

By law he is entitled to charge 25% on top of what the materials cost with vat because he is putting them on his business.

My builder was VAT exempt (his Dad is a financial advisor) and the way he did this is he ordered materials from the builder's merchants and then I paid them directly, over the phone with my credit card (for protection and for points reward scheme thing) We still got good rates at the builder's merchants because it is the builder ordering the goods, just the customer pays them.

We did this with everything. I paid all subcontractors directly, paid for all materials. Builder invoiced me every Friday and I paid him directly into his bank account for his wages.

You might want to mention this to your builder as it could change the way he works.

Ah, ok, thanks Guerre. Anyway, he has told us he is over the threshold, so I guess the date he did it doesn't matter.

I am still a bit confused as to whether he is able to reclaim all the VAT he will pay on materials in our build though? And if it is reasonable to expect a decrease in costs based on this?

I am still a bit confused as to whether he is able to reclaim all the VAT he will pay on materials in our build though? And if it is reasonable to expect a decrease in costs based on this?
The VAT has to be paid on the materials. It can be paid as part of his overall quote, and he then claims back what he paid in VAT at the supplier, or if the builder is not VAT registered he pays VAT at the supplier and that is the only part of the job accruing VAT.
Thus the new quote including VAT should not include additional VAT on top of what was quoted initially as that price should have included VAT on the materials at source.

ok, thanks for the other answers. Now he's over the VAT threshold it won't make any difference if we pay subcontractors or suppliers directly, as he will have to charge us VAT anyway.

And sounds as though we can't expect to have the 20% material costs discount I was hoping for. Gah! There goes the quartz worktop.

Ah, thanks Momb. Does that mean we should only expect the quote to increase by 20% on the labour part of the quote?

Was the quote silent on the issue of VAT or did it say £X plus VAT? The normal position would be that a price quoted should be inclusive of any VAT unless it explicitly states it excludes VAT. This is the builder's error (and something which he should have had in mind as a possibility when quoting) I would be expecting him to absorb the VAT he is now liable to pay in the the price quoted .
(NB I am not a tax expert but that's what I understand the position to be.)

MaryThorne - we had a conversation about him not being VAT registered, so we knew it was exclusive of VAT. We even delayed the start so he didn't go over the threshold for the 12 months, so I'm not sure how it happened, but presumably it was not his intention.

You won't get the discount on materials you were hoping for, no.

Say he was going to bill you for £1200 materials and £2000 labour. Beforehand, his £1200 for materials would be a gross cost, as he would have to pay VAT on the cost, and would not be able to reclaim it.

Now, he will bill you £1000 materials and £200 VAT. You still pay £1200.

But, in effect, your bill is only increased by the VAT on the labour cost.

So, in my example above, originally you would have paid £3200, and will now pay £3600.

If you had a contract with him that he would do the works for £3200 (per my example) in the first place, he would have to stick to it, but it sounds like he hasn't started yet, so you are probably both in a position to back out of the original agreement, or amend it.

Thanks, SanityClause. Makes sense re. the cost only increasing on the labour portion of it. Unfortunately, the initial quote was quite heavily weighted towards labour, as we had agreed to source and supply quite a few of the materials ourselves. It was still a quote, and not a contract though, so yes, we could both back out. Although I really really don't want to find anyone else. Apart from this being very annoying, we really liked him, and we got some great independent recommendations from the people he's currently doing work for (friends of friends).

Personally I think that is really bloody cheeky. You contracted him at one price, he's now upped his price by 20%. Also, how do you know he is telling the truth about going over the threshold??

He shpuld have foreseen going over the threshold and quoted accordingly imo.

We sort of had this. One of the builders we got to quote wasn't registered for VAT but when I asked if his quote included vat or not he said our job would push him over the threshold. He suggested splitting the diifference and he would fund 10% and us the other 10%. I thought this was a bit cheeky as effectively the materials cost already included vat and it was just the labour that needed to be increased.

Anyway we used another builder in the end who wasn't registered - we paid for most of the materials/sub-contractors etc, to help keep his turnover down.

Ragusa - we haven't contracted him though, we are still drawing up contracts.

And I'm guessing it's really easy to go over the VAT threshold if you are very close to it, and it's on a rolling 12 month basis. It's very hard to keep a very tight control over when people pay you, and I guess if someone pays you early for any reason it can push you over. I'm being charitable because I run my own business, and I'm a bit shit at accounting, so this is the kind of thing I can imagine happening to me ;)(my business is an LLP and mercifully I don't have to deal with VAT, but still).

VAT liability is calculated on a rolling 12 months previous income, so it doesn't matter when his business tax year is.

Close but not quite right. The HMRC website says "You must register when you go over the threshold, or know that you will." So you need to be a bit more forward-thinking, and not rely on registering after the event. (are you listening OP? )

I think you should ask him to honour his quotation.

Unless he's running cash accounting when people pay up won't matter. It will be when invoices were issued so really no excuse for not knowing.

I also think he should honour the quote. Why should his failure to manage his business be your problem?

That said I'd probably split the difference on labour costs for his work and where possible pay contractors he uses directly.

That said I'd probably split the difference on labour costs for his work and where possible pay contractors he uses directly.

I understand where you're coming from on the cost-saving angle but this could cause future problems. If there is some dispute then the builder can wash his hands of it and tell you to sort it directly with the subbie. Or they can start blaming each other for time/cost over-runs.
You want the one buck-stops-here person.

I didn't say manage, I said pay. Not the same thing at all.

I'd be very suspicious of any builder who specialises in extensions and loft conversions who claims they've only just gone over the VAT threshold.

It's only £82k turnover.

Most extensions/ conversions are probably £10k plus so he either doesn't work a lot or should have been VAT registered a long time ago.