You are planning improvements to your business premises; you will be using individual contractors for the work as they provided you with the best quotes. However, none of them is VAT registered which could mean you paying hidden VAT. Why and how can you reclaim it? Elaine Wight advises.
With inflation rising, everyone is keen to keep costs down. Ensuring that your business reclaims all of the VAT it’s entitled to is an important part of this effort, including VAT that you might not realise you are paying.
VAT is chargeable at each link in a supply chain. This means that as the value of a product or service increases so does the amount of VAT. However, each interim supplier can reclaim the VAT they are charged unless they are not registered. If you are next in the supply chain (or the final customer) you’ll bear the cost of this hidden in the price that you pay.
Abacus Ltd enters into a contract with David, a sole trader, to refit and redecorate its offices. David is a sole trader and is not VAT registered. His quote is £9,600 and this includes the cost of the plumbing supplies (without any mark-up), tiles etc. of £3,600 (including VAT of £600). David passes this cost to Abacus as part of his bill. The firm isn’t entitled to reclaim the £600 VAT even if David itemises it separately on his invoice. By contrast, had Abacus used a registered trader it could have reclaimed the £600.
Abacus could of course use a registered plumber which would entitle it to reclaim the VAT it pays on the entire bill but this won’t necessarily make the job cheaper as higher rates might be charged for the services.
When comparing quotes for goods or services remember to check if the suppliers are VAT registered. To get a proper price comparison you must compare the full price quoted by those unregistered against the net of VAT price quoted by registered businesses.
Reclaiming the hidden VAT
If you’re using an unregistered supplier for services which include goods, as in the example above, there’s an opportunity to reclaim the hidden VAT on those goods.
The facts are the same as Example 1, but Abacus negotiates the following terms. It will source and pay for the materials recommended by David (£3,000 plus £600 VAT). David will charge for his services plus any mark-up on the goods included his original quote, that is to say £6,000. Abacus reclaims the VAT on the materials meaning that the total cost of the job is £9,000 instead of £9,600. David is no worse off as he makes the same gross profits from the job as he would have done based on the price he first quoted.
In Example 2, Abacus can still make arrangements with David so that he orders and collects the goods he’ll need for the job, on the basis that the price he charges is included in his £6,000 bill. However, it’s important that the purchase transaction for the goods must be direct between the supplier and Abacus. This will also mean that the paperwork will show Abacus as the customer.
If you’re buying a single supply which includes goods and services, for example building work from an unregistered trader, negotiate with the supplier to acquire the goods direct. That way you can reclaim the VAT on the cost of these which would otherwise be hidden in the overall price for the job and so not recoverable.