For many construction companies, a failure to understand the nuances of VAT ratings is exposing them both to unnecessary risk of repayments, suspension conditions – even fines; it is also undermining longer-term client trust and business opportunity.
On the other hand, as Michele Harris, VAT Director, Bracey’s Accountants, explains, getting VAT right, from the outset of a project through to its conclusion, can save firms and clients significant amounts of money; ensure HMRC compliance and minimise the risk of investigations; and, moreover, build a solid foundation for future growth.
Getting VAT right within the construction trade is a tricky business. From knowing which of the five different VAT rates (20% standard rate; 5% reduced rate; zero rate VAT; exempt; and outside the scope) applies to a particular project or part thereof, to correctly claiming expenses and knowing what you can reclaim against, the complexities are vast.
This complexity means that the industry is at high risk of HMRC investigations, due to the volume of jobs that are not standard rated. Add in the planned, albeit delayed, Reverse Charge VAT changes, which now look likely to come into force during 2021, and many construction companies will become repayment traders, making them even more likely to come under scrutiny.
Yet, few firms have the in-house expertise to ensure they are getting their calculations right and are therefore unlikely to be able to provide the necessary due diligence when the VAT man does come calling. Take, for example, the London-based sub-contractor who was told by their main contractor to charge VAT at 3.7% based on partial exemption calculations the main contractor had calculated. A mock inspection showed that the sub-contractor had no evidence of their own that this calculation was indeed correct. Yet if proven incorrect, then it would be the sub-contractor who is liable for the outstanding tax and / or penalty.
Beyond the basics
At its most fundamental, therefore, being able to demonstrate that you’re charging the right rate – or have at least undertaken due diligence – is key to ensuring HMRC compliance.
Yet, having a better understanding of the nuances of VAT rates also provides opportunities for construction companies to build better, longer-term client relationships by adding value beyond the building work itself.
Let’s imagine that the construction company putting up a new building on a school estate that was going to house an office space and a nursery – or the organisation creating an outbuilding connected by a covered walkway to its client’s main premises – had been able to suggest straightforward changes at the design stage, both would have been able to save their clients 20% VAT on the building work.
In the first example, removing the office and putting Key Stage 1 pupils, rather than the nursery, in the new building and removing the covered walkway in the second, would have changed the VAT rating of the buildings from 20% standard rate to 0%.
For organisations such as schools and charities, and indeed many private businesses – savings of 20% on a £250,000 expenditure, can make a huge difference – and one that is likely to stand the firm in good stead for potential repeat business and / or referral.
Construction companies, mid-sized businesses in particular, are vulnerable to VAT inspections, with the risk only set to increase. Getting VAT right is complex, and many firms know that they struggle. Yet help from those who have been in the VAT world is available.
In some cases, it can be relatively straightforward to help clients with their funding. In other cases, it’s not so simple. But in both cases, early input from a VAT expert can provide construction companies and their clients the necessary due diligence to ensure HMRC that you’ve got your declarations correct, whilst saving significant amounts of money, making yourself more competitive – and laying the foundation for a transparent and trusted advisory engagement.