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bigduckontax, Accountant
Category: Tax
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I am towards the end of a renovation project for a new home;

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I am towards the end of a renovation project for a new home; when we bought the building in July 2015 it was lived in as four bedsits (separate kitchen units, gas meters etc.) and we are converting to a one family home. From meeting on I understand that VAT Notice 708 applies where number of dwellings is changed and that the building works should be charged at 5% VAT rather than 20%. We have paid 20% VAT to date. I would like advice about how to claim back the 15% VAT and how to proceed with the remaining payments to the builder. Thank you

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

You are correct, VAT should only have been charged on these works at 5%. The only way to do this would be to go to the contractor or contractors who did the job and get them to raise a correct invoice. You will not be popular!

Advise the builder that he is charging VAT at the standard instead of the reduced rate, calculate the excess you have paid and recover by underpaying any future bills. The risk here, of course, is that he will simply walk away from the job.

I am so sorry to have to rain on your parade.

Customer: replied 8 months ago.
Can they reclaim the VAT though assuming it's been collected from him at 20%? As I wouldn't want them to be out of pocket?

Well they can adjust it in the long term by underpaying VAT, but it is a palaver. I would not be too kind on the builder, he has pocketed 15% of the costs and may only have accounted for reduced rate of VAT to HMRC.

Customer: replied 8 months ago.
I think he will have accounted full rate to HMRC as I don’t think he was aware of this. Will it be the same for the architect?

No, VAT Notice 708 is specific on this matter:

'The supply of architectural, surveying, consultancy and supervisory services is always standard-rated.'

I also regret to have to tell you that you should have warned the contractor that the supply was reduced rated before work commenced for the convenience of all concerned.

Customer: replied 8 months ago.
I realise that - I had no idea! I will have to do the work for him in clawing it back - would that be through his HMRC contacts?

No, he could do it by issuing correct invoices and creating a suspense account in his books for the overcharged 15% then as he underpaid HMRC in subsequent periods the account would be written off.

Customer: replied 8 months ago.
What evidence will HMRC need upfront to approve the 5% rate? Or would that only apply if they investigate later?

None, he would just need supporting evidence in the event of an investigation and the old and revised invoices would cover that. I reckon it must happen more often than you realise.

Customer: replied 8 months ago.
Would we need to send photos of the bedsits as now it is one House and we bought it as one sale though it was lived in as 4 units? We have those. I just wonder how HMRC validate that 5% should apply.

I feel that you are over worrying on this matter. Reduced rate building services happen every day of the week.

Customer: replied 8 months ago.
Ok your advice is much appreciated.

Delighted to have been of assistance.

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Thank you for your excellent support.