3. TEORÍA GENERAL DEL DERECHO SUCESORIO Y
3.2 El Derecho Sucesorio en el Ecuador
34 A property owner who was planning a "qualifying" renovation asked about VAT when she was asking in a well-known high-street retailer of window, conservatories, doors etc and asked about their supply and installation cost. She explained that the project is a "qualifying" renovation and asked for the 5% reduced rate discount. Unfortunately, neither the shop assistant or floor manager knew anything about the 5% rate, although their head office was able to confirm that the reduced rate would apply.
Unfortunately, this is still quite a common scenario, despite the fact that the reduced rate has applied to certain conversions and renovations for over 10 years now. A lot of contractors will only charge the 5% rate if they are satisfied that it’s correct and that they won’t end up having to foot the bill if HMRC disagrees.
That's why it's essential that YOU understand when the reduced rate applies- you can't rely on the retailer to get it right!
The information about the reduced rate is explained in VAT Notice 708: buildings and construction http://tinyurl.com/pv9wvxh. Refer the retailer/contractor to this if they aren’t aware of the 5% rate or don’t agree. Their accountant should be able to confirm the issue for them.
Nowadays, a lot of contracts for such work will list the work that is liable for the reduced rate. I’d also suggest including some provisions in case HMRC dispute the liability at a later date, to ensure that you and the contractor agree how to cover the cost of any undercharged VAT.
If you understand how the rules work and when the 5% rate applies, you can make some very significant savings, so make sure you know the rules before you start spending money. So why not have everything done by non-registered contractors and save VAT that way? Using non-registered contractors is the only way to avoid VAT on labour costs. However it means that you will be paying 20% on all the goods and materials supplied by the contractor. The 20% cost on materials will be built into that quote from the unregistered contractor.
The examples below demonstrate the differences in cost depending on whether the contractor is registered for VAT. In each case, the charge for labour is £1,000 net of VAT. The examples show the difference based on goods that are less than the services, the same cost as the services or much higher than the services: £100, £1,000 and £10,000
Example 1: Cost of goods less than the services. Unregistered contractor:
VAT inclusive goods: £120 Labour: £1,000
Total: £1,120.
Registered contractor: If he is registered for VAT, he can claim the £20 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
35 Labour : £1000
Total net: £1,100 plus VAT @ 5% = £1,155
In this case, using a non-registered contractor can save £35 Example 2: Cost of goods and services are the same. Unregistered contractor:
VAT inclusive goods: £1,200 Labour: £1,000
Total: £2,200
Registered contractor: If he is registered for VAT, he can claim the £200 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
Net cost of goods: £1,000 Labour : £1,000
Total net: £2,000 plus VAT @ 5% = £2,100
In this case, using a registered contractor can save £100.
Example 3: Cost of goods is significantly higher than the labour Unregistered contractor:
VAT inclusive goods: £12,000 Labour: £1,000
Total: £13,000.
Registered contractor: If he is registered for VAT, he can claim the £20 from HMRC but has to charge 5% VAT on the total net cost of the goods and services.
Net cost of goods: £10,000 Labour : £1000
Total: £10,000 + £1,000 = £11,000@5% = £11,550.
In this case, the saving from using a registered contractor is proportionately much higher; i.e £1,450 So the potential saving depends on how much of the cost is for materials and how much for labour. In practice, using an unregistered contractor is only cheaper if there's a higher proportion of labour to materials (whether it's bricks and mortar or new windows). I'm sure that there is a mathematical formula that can work out the "tipping point" and quickly calculate when it's more cost effective to
36 use a registered or non-registered contractor, but I'm no mathematician so I always end up doing the calculations using a calculator!
Either way, it might still be less expensive for you; but I'd suggest getting quotes from a number of contractors, including both registered and non-registered and see how the figures work out. Either way, it’s worth spending some time working out the figures to see which is the most cost effective way of engaging contractors.
But remember: VAT is only one issue that you need to consider. Over the years, I've seen many people get very bogged down in trying to save a few £100 VAT by employing the "cheapest" non- registered contractors or messing about asking a labour only
contractor to buy goods at 20% and charge 5%. They may save a bit of money, but it's easy to lose sight of the big picture and end up with a lousy conversion or new dwelling. Don't engage a contractor who isn't registered for VAT just to save a bit of money if your gut is telling you to engage the VAT registered contractor.
Why not just pay in cash to avoid VAT altogether?
If you ask a contractor to do any work for cash to avoid paying VAT, you are asking the contractor to commit fraud by knowingly under-declaring VAT. You would be jeopardizing the
contractor’s business simply to save yourself a bit of cash. Of course, some contractors might agree, but then just ask yourself: if they’re willing to cheat the VAT man, then you have to wonder whether they're also cheating you.
Architects, surveyors, project managers...
And finally, a word for those architects, surveyors and project managers out there. I often get queries from private individuals who are struggling to deal with VAT and find that their architects or surveyors don't understand the VAT rules very well at all. There seems to be a lot of confusion about how VAT works and when it applies to the property developments discussed in this book. Of course, VAT is a complex subject, but if you can get your head around the basic principles, then you'll be better able to identify potential savings for your clients and help them to save money in the long run.