Builder asking me to pay for materials cash to 'save VAT'?

lb00

Hi everyone,

I’m currently renovating my house and have an agreement with the builder for a price excluding materials. Since the carpenter, who is on site daily and doing most of the work, is a family friend, we agreed with the project manager to pay for materials separately. As a discount arrangement, the agreement was we'd pay for the materials at cost (no markup) upon presentation of receipts.

Recently, the project manager asked me to pay for materials—around £1,000 NET i.e. £1,200 GROSS—in cash instead of providing an invoice. He mentioned this would allow us to “save the VAT.”

However, he’s asking me to pay the GROSS amount, which includes VAT (£1,200). From my understanding, as a VAT-registered business, he will likely reclaim the VAT from HMRC in his VAT return.

This seems like double compensation for the VAT—once from my payment of £1,200 (including VAT) and again by reclaiming the VAT from HMRC.

What do you think about this situation?

Thanks for your advice!

Northern_Wanderer

Paying for materials at "cost" might give you a discount as the tradesperson might be getting a discount on his account with the supplier. There would still be VAT involved there.

Usually when these people offer to do the work for cash (no invoice) they are trying to avoid tax with HMRC so they give you a discount by claiming not to charge you VAT. I'm quite shocked by the number of white van men that try this out. Personally when I'm contracting someone to do work for me, I want an invoice in case anything goes wrong. It's not a £50 job, we are talking thousands and work on your property. You have zero come back if you pay cash and you're obviously assisting in fraudulant activities since these guys are not declaring the income on their tax or VAT returns. We are all paying for this.

Grumpy_chap

lb00 said:

Hi everyone,

I’m currently renovating my house and have an agreement with the builder for a price excluding materials. Since the carpenter, who is on site daily and doing most of the work, is a family friend, we agreed with the project manager to pay for materials separately. As a discount arrangement, the agreement was we'd pay for the materials at cost (no markup) upon presentation of receipts.

Recently, the project manager asked me to pay for materials—around £1,000 NET i.e. £1,200 GROSS—in cash instead of providing an invoice. He mentioned this would allow us to “save the VAT.”

However, he’s asking me to pay the GROSS amount, which includes VAT (£1,200). From my understanding, as a VAT-registered business, he will likely reclaim the VAT from HMRC in his VAT return.

This seems like double compensation for the VAT—once from my payment of £1,200 (including VAT) and again by reclaiming the VAT from HMRC.

What do you think about this situation?

Thanks for your advice!

Is the Builder / Carpenter a VAT-registered business?

It may be that the tradesperson is, on a labour only basis, below the VAT-registration threshold.  
Is the proposal that they will collect the items from the retailer, but you need to pay cash which can be passed straight on to the retailer, so these items never belong to the tradesperson and never go through their accounts.

For a larger business that provide everything, you would be paying VAT on the labour plus materials.  The materials would also, likely, be subject to a mark-up.  So that £1k + VAT would become (£1k + markup) + VAT.

lb00

@Grumpy_chap @Northern_Wanderer

Thank you for your replies.

Just to make sure as perhaps I haven't been clear enough, I will be paying all the work with invoices by bank transfer. The issue above is only regarding the materials which we left out the final price, for which he has provided receipts and asked me to pay cash.

Am I correct in assuming the builder will claim the VAT back on those invoices for the materials he bought? 

The business is VAT registered. He has accounts with some of these suppliers, some other he has paid by credit card.

If his cost for the material is actually the Net price, as he is reclaiming VAT, but he is asking me to pay the gross with VAT even if I pay cash for these materials, then it seems to me he is recovering VAT twice, once from HMRC and once from me.

Thank you.

Hoenir

If you are giving him "cash" then it's likely that this isn't being declared. Trades people frequently dig themselves sizable holes when it comes to defrauding the HMRC.  They are astute at detecting instances of games being played. Once they've go their teeth in they don't let go. 

mcplumb

lb00 said:

@Grumpy_chap @Northern_Wanderer

Thank you for your replies.

Just to make sure as perhaps I haven't been clear enough, I will be paying all the work with invoices by bank transfer. The issue above is only regarding the materials which we left out the final price, for which he has provided receipts and asked me to pay cash.

Am I correct in assuming the builder will claim the VAT back on those invoices for the materials he bought? 

The business is VAT registered. He has accounts with some of these suppliers, some other he has paid by credit card.

If his cost for the material is actually the Net price, as he is reclaiming VAT, but he is asking me to pay the gross with VAT even if I pay cash for these materials, then it seems to me he is recovering VAT twice, once from HMRC and once from me.

Thank you.

You will only be paying the correct price, so you will be no worse off.

What the builder does is up to him. If he's trying to claim the VAT back as part of his usual trading, on an inspection HMRC would want to see evidence of those transactions - so he's potentially going to land himself in very hot water. 

justwhat

He may be claiming the vat back, also possibly using the invoice on another job to keep his profits down.

Section62

lb00 said:

I’m currently renovating my house and have an agreement with the builder for a price excluding materials. Since the carpenter, who is on site daily and doing most of the work, is a family friend, we agreed with the project manager to pay for materials separately. As a discount arrangement, the agreement was we'd pay for the materials at cost (no markup) upon presentation of receipts.

Recently, the project manager asked me to pay for materials—around £1,000 NET i.e. £1,200 GROSS—in cash instead of providing an invoice. He mentioned this would allow us to “save the VAT.”

....

Who is the project manager, and what relationship do they have with the builder and the carpenter?

As the original arrangement made no mention of cash and avoiding VAT, I wonder whether it is just the project manager making a mistake that the reason for paying cash is to "save the VAT" - i.e. the builder wants cash for some other reason.

Cash jobs (no VAT) by VAT registered traders go on all the time, but typically for smaller jobs or where the trader knows the client very very well.  Making a request for payment in cash to avoid VAT via a third-party project manager would be a bit more unusual... the more people involved the more likely it is to get found out.  Hence the question about the relationship.

la531983

His tax arrangements arent your concern tbf

Grumpy_chap

lb00 said:

@Grumpy_chap @Northern_Wanderer

Thank you for your replies.

Just to make sure as perhaps I haven't been clear enough, I will be paying all the work with invoices by bank transfer. The issue above is only regarding the materials which we left out the final price, for which he has provided receipts and asked me to pay cash.

Am I correct in assuming the builder will claim the VAT back on those invoices for the materials he bought? 

The business is VAT registered. He has accounts with some of these suppliers, some other he has paid by credit card.

If his cost for the material is actually the Net price, as he is reclaiming VAT, but he is asking me to pay the gross with VAT even if I pay cash for these materials, then it seems to me he is recovering VAT twice, once from HMRC and once from me.

Thank you.

OK, so you have an agreed price of £X + VAT for the labour.  That is all going through the books, paid by bank transfer, invoiced accordingly.  You are happy with that side of things.  Is that correct?

The materials are additional.  They will be purchased from a stockist and you need to pay extra.  If you give cash to the builder, and that cash value equals the value of the materials plus VAT as shown on the stockist's receipt, you have paid the correct amount and there is no mark up.  It is not important whether he is putting this value through the company accounts or treating this as though he is purely collecting the items for you, which you have paid the supplier directly.  The request for cash might be for that reason, or might be a genuine cash-flow issue.

No-one can answer the question "Am I correct in assuming the builder will claim the VAT back on those invoices for the materials he bought?"
I don't think that is as important as you assess it to be.

As for recovering the VAT twice, this also would not make any difference to the price you pay.
If the materials go through the business, then Trader Ltd buys parts at £100 + VAT = £120 transaction value. 
The £20 is reclaimed as input VAT.  Nett cost to the business £100.
The VAT-registered business then sells these parts to you without any mark-up so charges you £100 + VAT = £120.
The £20 VAT is output VAT and will be paid to HMRC (negating the input VAT reclaimed).  Nett income to the business £100.
The business has made nothing from this.  You have paid no extra.

Albermarle

Northern_Wanderer said:

Paying for materials at "cost" might give you a discount as the tradesperson might be getting a discount on his account with the supplier. There would still be VAT involved there.

Usually when these people offer to do the work for cash (no invoice) they are trying to avoid tax with HMRC so they give you a discount by claiming not to charge you VAT. I'm quite shocked by the number of white van men that try this out. Personally when I'm contracting someone to do work for me, I want an invoice in case anything goes wrong. It's not a £50 job, we are talking thousands and work on your property. You have zero come back if you pay cash and you're obviously assisting in fraudulant activities since these guys are not declaring the income on their tax or VAT returns. We are all paying for this.

By paying in cash you are doing nothing wrong. You can pay for goods and services how you like.
You have no idea what they are doing with their tax affairs.

Now you may well feel that some tax evasion is going on and on moral grounds decide you prefer not to pay cash, but it is not fraudulent to pay in cash.