Do you need a certificate from the client to zero rate or reduce rate construction VAT? Reply

Dwellings

The rules are in the VAT Notice 708 and in section 17.1 it states

There’s no requirement to hold a certificate for zero-rated or reduced-rated supplies in connection with buildings that will be used as one of the types of dwelling described at paragraphs 14.2 to 14.5.

Zero Rating – an example would be building a new house

Reduced Rating – this applies to converting a non-residential building to a dwelling or multiple dwellings

If your builder needs further details just point them at VAT Notice 708.

Don’t accept invoices which have the wrong VAT rate on them, even if you can claim the VAT back because HMRC will only accept the recovery of VAT when its charged at the correct rate

When do you need a Certificate?

You need to hold, within your business records, a valid certificate when you make any zero-rated:

  • or reduced-rated supply in connection with a building that will be used solely for a ‘relevant residential purpose’ – see paragraph 14.6
  • supply in connection with a building that will be used solely for a ‘relevant charitable purpose’ – see paragraph 14.7

Possession of a valid certificate does not mean that you can automatically zero rate or reduce rate your charge. The certificate merely confirms that the building is intended to be used solely for a qualifying purpose. You must meet all of the conditions explained in the relevant sections of notice 708 to zero rate or reduce rate your supply.

The customer for the zero-rated or reduced-rated work issues the certificate. The certificates at section 18 of VAT Notice 708 can be used, or the issuer can create their own certificate provided it contains the same information and declaration.

The 2 available certificates confirm that you’re either eligible to receive:

  • zero-rated or reduced-rated building work (the certificate can be found at paragraph 18.1)
  • a zero-rated sale or long lease (the certificate can be found at paragraph 18.2)

What if you get it wrong?

If you issue an incorrect certificate, you may be liable to a penalty equivalent to the amount of VAT not charged. A penalty is not VAT and, if you’re registered for VAT, you will not be able to recover it as input tax.

A penalty will not be issued, or will be withdrawn, if you can demonstrate that there’s a reasonable excuse for issuing the incorrect certificate.

What if the use changes?

If you have obtained zero rating for the construction or acquisition of a building (or part of a building) because you certified that it would be used solely for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, HMRC expect that the building will be used solely for either or both of those qualifying purposes for a period of, at least, 10 years following completion of the building.

If the building ceases to used solely for either or both of those qualifying purposes within that 10-year period, if that use decreases or if the building is disposed of, a taxable charge comes about, on which you must account for VAT.

What about Materials?

Retailers and builders merchants charge VAT at the standard rate on most items they sell.

Builders charge VAT on ‘building materials’ that they supply and incorporate in a building (or its site) at the same rate as for their work. Therefore, if their work is zero-rated or reduced-rated, then so are the ‘building materials’. But some items are not ‘building materials’ and remain standard-rated.

steve@bicknells.net

How do you account for Construction Retentions? 1

Home Office

It’s a very common question, the client pays you and keeps a retention of 5% reducing to 2.5% on completion  to be released after the end of the defects period.

You do the same with your sub-contractors.

The retentions need to be held in balance sheet accounts as they can’t be invoiced to client and aren’t due to the sub-contractors. But they should be included within sales and sub-contract costs.

HMRC’s guidance is in BIM51520

In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.

In their accounts, builders will generally deal with retentions in one of the following ways:

  • include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
  • defer recognition of retentions until their receipt becomes virtually certain.

Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.

In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.

A challenge will only be appropriate in worthwhile cases. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect (compared with the alternative provisions method).

There is guidance on VAT in VATTOS5170

……the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.

steve@bicknells.net

 

Are you ready for massive construction growth? Reply

at a construction site

According to the Construction Products Association summer forecasts, output will rise by more than 22% over the next five years. Private housing starts are expected to grow by 18% in 2014 and 10% in 2015. Commercial offices output is also projected to grow 10% this year and 8% in 2015.

The CITB Construction Skills Network predicts that 182,000 new jobs will be created in the UK construction industry between 2014 and 2019 as employment rises for the first time since the start of the recession in 2008.

A Close Brothers survey in May showed that 65% of construction firms admit that access to cash is a major challenge for their business.

So can we keep pace? where will the construction workers come from? and will we be able to fund the projects?

steve@bicknells.net