Builder is going VAT registered + how to proceed:?

fredsmith · 8 January 2018 at 11:06PM

Hi,

We had a quote from a builder for a house extension.
For what we want it's the lowest quote we've had by a few grand. As we were refining the quote with him in a future meeting, he mentioned that he's currently not VAT registered but he will have to become VAT registered soon.

He said any works carried out before the registration date will not include VAT but any works after will include VAT on both materials and labour. I originally thought it was just the labour but it's apparently materials too. I checked the HMRC website and I can only assume that he adds a markup on the materials which prevents him from classifying materials as "disbursements" and instead they're classed as "recharges" and therefore 20% VAT needs to be added. Is this correct?

If we put the few weeks where he is not VAT-registered to one side for the moment, this increases the cost a full 20% which is a huge increase for us.

His accountant said we can partly work around this by invoicing us for some future materials/labour before the registration date and this saves us the VAT on whatever is invoiced. The thing is, the idea of paying for future goods/services before they're complete is obviously a risk when we're dealing with numbers this big.

He also said he would pass us back the VAT he reclaims on the materials when he does his VAT return. We'd obviously have to wait 3+ months for us to receive this and the big question is what if he doesn't pass us it, or as much as we expect?

He lives locally, really wants the job and we have no reason to really believe he's unreliable. I think he's probably trying to do us a favour here, but all this proposed messing about makes me nervous as it's all the money we have. I think it's a big ask and at the end of the day we still don't actually *know* him personally.

Does any of this make sense or should I proceed with extreme caution here?

Thanks,
Fred

Warwick_Hunt · 8 January 2018 at 11:10PM

fredsmith wrote: »

Hi,

We had a quote from a builder for approx. 50k for a house extension.
For what we want it's the lowest quote we've had by a few grand. As we were refining the quote with him in a future meeting, he mentioned that he's currently not VAT registered but he will have to become VAT registered soon - a few weeks after the project is due to start.

He said any works carried out before Feb 1st will not include VAT but any works after will include VAT on both materials and labour. I originally thought it was just the labour but it's apparently materials too. I checked the HMRC website and I can only assume that he adds a markup on the materials which prevents him from classifying materials as "disbursements" and instead they're classed as "recharges" and therefore 20% VAT needs to be added. Is this correct?

If we put the few weeks where he is not VAT-registered to one side for the moment, this takes the cost up to about £60k which is a huge increase for us.

He spoke to his accountant and said we can partly work around this by invoicing us for some (but not all) future materials/labour before Feb 1st and we can pay those invoices throughout Feb. This saves us the VAT on whatever is invoiced. The thing is, the idea of paying for future goods/services before they're complete is obviously a risk when we're dealing with numbers this big.

He also said he would pass us back the VAT he reclaims on the materials when he does his VAT return. We'd obviously have to wait 3+ months for us to receive this and the big question is what if he doesn't pass us it, or as much as we expect?

He lives locally, he really wants the job (to the point where he's offered to throw some things in for free) and we have no reason to really believe he's unreliable. I think he's probably trying to do us a favour here, but all this proposed messing about makes me nervous as it's all the money we have. I think it's a big ask and at the end of the day we still don't actually *know* him personally.

I'm wondering if there's another way round this? I'd much rather he reduced his overall margins on labour and materials or something - then there's no messing about for me.

Does any of this make sense or should I proceed with extreme caution here?

Thanks,
Fred

Alarm bells are ringing on so many levels.

docmatt · 9 January 2018 at 12:01AM

Ah, the old “I’m going to be vat registered in a few months time so pay now whilst it’s cheaper” routine.

Say you’re interested but would like to ask the advice of his accountant too and watch him squirm.

glasgowdan · 9 January 2018 at 12:06AM

Wow... nope. He doesn't know what he's doing and this is absolutely going to go wrong, or at least end up being v complicated.

TheCyclingProgrammer · 9 January 2018 at 1:18AM

Even if the builder was not adding a markup to the cost price of the materials it’s very unlikely that they would be treated as disbursements. They are materials that the builder needs in order to deliver the service agreed and therefore would always form part of the overall service cost (so yes, the costs passed on to you are recharges although they don’t necessarily need to be broken down as such on any invoices).

So as far as the materials go, if he passes the cost on at net cost plus VAT it shouldn’t make any difference to you.

As for the rest, invoicing before the work is completed seems questionable to me.

stator · 9 January 2018 at 1:38AM

Don't get involved in even discussing this.

Stick to a normal agreement.

You pay when the work is done. Agree milestones and interim payments if you wish.

Don't get into VAT on materials and labour etc. Just ask him for a quote, including VAT where applicable. Then compare against other quotes.

Sorting out the VAT is his concern. Nothing for you to worry about.

I wouldn't even think of agreeing to 'maybe getting a VAT refund later when he does his VAT return'. Everything needs to be agreed into the standard price.

If he wants to give you a different price if you complete the job before the end of this tax year instead of next year, then that's fine. But do not pay him anything upfront.

Doozergirl · 9 January 2018 at 7:05AM

There’s no question that the materials are chargeable at 20%. They are essentially being sold to you to create the product. If you live in your house then the work is all 20% rated. I bet no on else has quoted in multiple rating bands!

There are no refunds, so please don’t enter into an agreement along these lines as he cannot operate his business on terms like that. He will be paying HMRC for your project, not receiving refunds.

He needs to consider his pricing of materials without VAT when quoting (all builders merchants quote before VAT anyway) and then add it on top. It’s actually pretty hard to think of how much things cost with VAT, when you aren’t VAT registered!

It’s clear that the poor guy doesn’t understand VAT. I don’t blame him particularly, but he needs to invest in some training for himself. He also needs to value himself, not act like he’s desperate for work. Cutting the job to the bone is no way to run a job - they almost always costs us more than we think too!

This doesn’t set alarm bells ringing in terms of you being ripped off, but does this increase take the job into the realm of the other builders? It’s really only correct that it is. No builder can build extensions, work all year and not be VAT registered. The threshold is too low to maintain a profitable, accountable (by that I mean responsible) business.

Also, the cheapest price is not the way to select a builder, especially if there is a discrepancy in their quote. Everyone has their own ways but a very cheap quote suggests that it may not get finished - you feel ripped off but the builder hasn’t actually charged you enough and you end up either with bills for ‘extras’ or he subsidises your job himself (pretty rare!)

The fact that he is not VAT registered suggests that he might be lacking the experience to build the extension in some way. Even if he is capable of the actual building work, he may not be pricing this correctly if this is one of his first ‘bigger’ jobs for himself.

I fear you are being blinkered by the price tag. If you value major work on your home by that only, you are likely to encounter problems.

What does this quote amount to per square metre, before VAT? How big is your extension? Have you issued a specification? Building Regs drawings?

Have you seen his previous work? What due diligence have you done into his capabilities? Spoken to previous customers?

Doozergirl · 9 January 2018 at 8:20AM

Are youbalso saying that you can’t even afford the other quotes, nor his with the 20% added? That sets alarm bells ringing because I really don’t think you’re motivated by the right things here because you can’t afford to be.

silvercar · 9 January 2018 at 9:40AM

Either the builder buys the materials and pays VAT when he buys or he becomes VAT registered and buys the materials with VAT then claims the VAT back but charges you VAT on the whole job.

Which ever way round, you are paying VAT on the materials part of the job. The only extra cost for you is the VAT you will now pay on the builder's labour and management of the work. So the total bill shouldn't increase by 20% as you were always paying VAT on materials.

eg say materials £2,000 net + everything else £1,000.

before VAT registration materials £2,400 inc VAT + £1,000 = £3,400

after VAT registration materials £2,000 + £1,000 = £3,000 + VAT = £3,600.

from builder's POV: buy materials @ £2,400 reclaim VAT -£400. charge job @ £3,600 pass £600-£400 to VAT man.

Eric_the_half_a_bee · 9 January 2018 at 9:51AM

Which ever way round, you are paying VAT on the materials part of the job. The only extra cost for you is the VAT you will now pay on the builder's labour and management of the work. So the total bill shouldn't increase by 20% as you were always paying VAT on materials.

Exactly this, which every accountant will understand. The fact his accountant says differently is very concerning.

Personally, I would run a mile, it sounds very dodgy.

Doozergirl · 9 January 2018 at 10:37AM

Eric_the_half_a_bee wrote: »

Exactly this, which every accountant will understand. The fact his accountant says differently is very concerning.

Personally, I would run a mile, it sounds very dodgy.

Except no one has allowed for the mark up on materials, which is perfectly acceptable and expected. The “product” is the extension.

It isn’t dodgy (poor bloke is going VAT registered after all) but the guy has no confidence in what is happening and his life would be easier when he quotes with VAT in future and potential clients don’t start reading HMRC guidance and interpreting it to benefit themselves.

I’d personally rather pay the going rate and end up with an extension. The VAT is actually none of the OP’s business, the builder doesn’t have to justifiy a penny of it other than charging the correct rate and yet the OP is essentially trying to knock the guy down on price in protest at the price increase.

They are perfectly welcome to choose any builder they like.

Builder is going VAT registered + how to proceed:?

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