Customer wants us to refund £27k vat

[TheLoser]

Good Afternoon,

To keep it brief - we were instructed by a registered charity to demolish an existing building and build a new, bigger building in its place.

The charity is vat registered as are we.

There was a total of £27,000 VAT charged over several invoices during the months that the project took.

After the project was complete they then said we should never have charged vat on our invoices (despite being vat registered) and in fact should have zero rated the work.

We had in that time completed our normal quarterly vat return accounting for that vat collected in with our chartered accountants.

Now they have found some small print from hMRC that says they can request that we ask for a refund of the £27k from HMRC and return it to them. This of course leaves our Ltd co at the potential of an investigation from HMRC for such a large refund whilst having returned the money to the client and if made to pay it back it would be us legally responsible to have to do so.am I wrong?

The criteria presented by the client to us to say it should be zero rated doesn’t add up, our accountant says it’s possible to do the refund in the next return but could be open to investigation.

We don’t believe it meets the criteria for zero rating, otherwise we would have done it.

We are of the belief we are not obliged to enact this refund as we have accounted for the vat in good faith.

They should have cleared this up with HMRC and got a ruling to say “contractor don’t charge vat it is zero rated” before we started work.

What is your advice?

Many thanks

 

[Scalloway]

I've just had a look at gov.uk site and their recomendation is this:

"The construction reliefs are complex so contact Charities and Community Amateur Sports Clubs to check entitlement to zero rating before commencing a project."

How VAT affects charities (VAT Notice 701/1)

Find out what a charity is, how VAT affects charities, how to treat a charity's income for VAT and what VAT reliefs a charity can get on what it buys.

www.gov.uk

 

[Daybooks]

As @Scalloway has indicated it is a complex issue and I would seek expert advice from a VAT expert. An interesting article on the subject is here:

The VAT relief that can bite back!

Charities are entitled to claim relief from VAT when they construct buildings, a good benefit for charities that generally can't recover VAT.

www.menzies.co.uk

PS - This is not a recommendation of them.

 

[WaveJumper]

Link above was an interesting read and I note the line that said the following which confirms what you yourself have already said:

"The customer must give a certificate to the contractor stating that the work qualifies"

Sounds like a real mind field of an area, personally I would in first instance throw it back at them and ask them for said certificate (which they should have applied for) but in the meantime I would be getting some advice ready from a VAT specialist to cover my backside.

Be interesting if you found out it was not being used solely for the charity in question, best of luck and please keep us updated on how you get on

 

[paulears]

Surely if a charity receives invoices of all sorts they constantly get charged VAT - so their accounts would surely recover VAT in the normal way. After all, HMRC has the VAT in question - not you. Why can they not simply process the input and output tax? If they get charged VAT, then surely for payments within their scope of operations they would recover it automatically? I don't understand VAT well enough to understand why there is a difference between zero rating it and not, if they are registered for VAT?

 

[Scalloway]

Being registered for VAT depends on having VATable sales. Many charities are funded by grants which are not VATable and the rest of their income may not reach the VATable threshold. Indeed if they have sufficient income to need to register for VAT it will probably have be done through a trading subsidiary.

Zero rating the invoice may make a differnce to the charity as their budgeted grant for the project may not include an allowance for VAT being charged.

 

[paulears]

Ah - I thought that it was based on turnover for charities the same as the rest of us. I get it now. Just assumed that with all that income, and then the expenditure on the worthy causes, that was the same as ordinary business - just the lack of a profit motive?

 

[Scalloway]

It is the same as an ordinary business in that income must exceed expenditure for the organisation to survive. However charities are funded by donations and grants. Donation and grant income is not consideration for a supply and is a non-business activity that falls outside the scope of VAT.

I was employed as an accountant by a large charity for many years and I have since volunteered as treasurer for several over the years.

 

[ZipserSir]

"The customer must give a certificate to the contractor stating that the work qualifies"

Just want to endorse what WaveJumper says - the customer needs to provide a certificate stating that the work qualifies.

It sounds like the charity made an unintentional mistake earlier in the process by not providing a certificate, but they need to put things right before you can make a claim from HMRC.

Best wishes!

 

[Bobbo]

To keep it brief - we were instructed by a registered charity to demolish an existing building and build a new, bigger building in its place.

Specifically what building (i.e. what is it to be used for) were you constructing for the charity?

The criteria presented by the client to us to say it should be zero rated doesn’t add up, our accountant says it’s possible to do the refund in the next return but could be open to investigation.

We don’t believe it meets the criteria for zero rating, otherwise we would have done it.

We are of the belief we are not obliged to enact this refund as we have accounted for the vat in good faith.

What do you mean by the criteria presented doesn't add up.
What criteria have they suggested and why do you consider it meet the criteria for zero rating?

They should have cleared this up with HMRC and got a ruling to say “contractor don’t charge vat it is zero rated” before we started work.

There's no reason why they should've done this. Obviously the charity should have clarified at the outset what the VAT treatment of the works was to be.

 

[TheLoser]

Thank you everyone for your feedback. We have taken the decision to DS01 the company as we have no more contracts going into 2026.

We will be doing a final vat return and de registering for vat. We have no debts.

We took advice from our accountants, and from a third party vat specialist as a precaution and the feedback is contradictory and not clear cut which is why we have delayed moving this forward.

if we choose not to proceed with a refund and dissolve the company by way of a DS01 - I’m assuming as the vat was accounted for properly certainly based on the facts at the time, there is no come back from them?

 

[Daybooks]

Thank you everyone for your feedback. We have taken the decision to DS01 the company as we have no more contracts going into 2026.

We will be doing a final vat return and de registering for vat. We have no debts.

We took advice from our accountants, and from a third party vat specialist as a precaution and the feedback is contradictory and not clear cut which is why we have delayed moving this forward.

if we choose not to proceed with a refund and dissolve the company by way of a DS01 - I’m assuming as the vat was accounted for properly certainly based on the facts at the time, there is no come back from them?

Thank you for the update. It would be useful if you could share the conflicting advice without revealing sources or breaking confidentiality. It would no doubt spark a further debate.

I trust the decision is for commercial reasons and thus for the charity this is just a consequence. I wonder whether you had received the certificate from the charity to enable any progress regardless.

The trustees are obviously miffed at their view of missing out on extra income. However, I didn’t see it mentioned but there is a good probability that the charity received either donations or grant funding say from a local council for this project. As such, especially for the latter, there is likely to have been a clause for any recoverable VAT to be returned to them. Thus them seeking the funds and retaining them may well amount to unjust enrichment.

One of the legal bods could probably answer your specific question more pertinently. Whilst they may not be a creditor you could advise them of the pending closure.

Good luck anyway.

 

[MikeJ]

Just for background, my wife is the chair of a Riding for the Disabled group. Last year they built a new indoor arena, with a total project value of around £1.1m. They spent a lot of time getting advice over the VAT situation, and one of the ongoing issues is what they use the arena for - no commercial activity, and limited fundraising activity. It's very, very complex,

 

[WaveJumper]

Thank you for updating us just sorry the outcome could not have been more positive best of luck in the future